U.S. weekly averages as of 7/22/2021
Week of July 19, 2021 in Review
Existing Home Sales increased 1.4% from May to June. While inventory remains a huge challenge for buyers, we are seeing some improvement with 1.25 million homes for sale, which is up 3.3% from May (and this also follows a 7% increase in the previous report). The median home price was up 23.4% year over year, coming in at a record high $363,300. However, it’s crucial to understand that this is not the same as appreciation, as explained below.
There was also an update on new home construction, though this gave us some mixed news. Housing Starts, which measure the start of construction on homes, were up 6.3% in June overall and, more importantly, so were starts for single-family homes. However,
Building Permits, which are a good forward-looking indicator, declined in June. Homes authorized but not started are up almost 60% year over year and this figure continues to climb, which reflects the delays we’ve seen due to higher costs and labor issues.
These supply, cost and labor issues were part of the reason builder confidence ticked down a notch this month. The National Association of Home Builders Housing Market Index, which is a near real-time read on builder confidence, fell one point to 80 in July. However, any reading over 50 indicates that more builders see conditions as good versus poor, so July’s reading still reflects a strong level of confidence and was helped by the high demand for homes that remains across the country.
Initial Jobless Claims did move higher in the latest week, as the number of people filing for unemployment benefits for the first time rose by 51,000 to 419,000. However, the number of people continuing to receive regular benefits decreased to a post-pandemic low, while the number of people receiving pandemic-related benefits also fell by 1.1 million. These declines seem to reflect the impact of states that have already ended
extended benefits ahead of the Labor Day expiration.
And of note, last week’s 20-year Bond Auction was met with average demand. The bid to cover of 2.33 was just under the 12-month average of 2.35. Direct and indirect bidders took 79.1% of the auction compared to 76.6% in the previous 12.
Lastly, you may have heard recent talk in the media about a housing bubble. Don’t miss our important analysis about this below.
What the Median Price of Existing Home Sales Means
Existing Home Sales, which measure closings on existing homes, rose 1.4% from May to June. On an annual basis, they were up 23% compared to June of 2020, which makes sense given the pandemic-related shutdowns last year.
Inventory still remains a huge challenge for buyers, though we did see an improvement. There were 1.25 million homes for sale, which is up 3.3% from May and this also follows a 7% increase in the previous report. While inventory is still down 19% year over year, it is getting a bit better.
The median home price was reported at a record high $363,300, which is up 23.4% year over year. Though the media might report this otherwise, it’s really important to understand that the median home price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it, and the rise is due to the amount of higher-end homes that are selling. Sales of homes beneath $250,000 were down 15%, while sales of homes over $1 million were up 150%. Real appreciation is around 14%, and while this is still a high number, it is significantly less than the 23.4% rise in the median home price.
First-time homebuyers have accounted for at least 31% of sales over the last 5 months. While affordability is certainly a bit tougher with higher home prices, rates are still very attractive and first-time home buyers are clearly hanging in there.
Meanwhile, cash buyers remained stable at 23%, though this number is up 16% from last year. Investors purchased 14% of homes, down from 17% from May.
Deconstructing Housing Starts Data
Housing Starts, which measure the start of construction on homes, were up 6.3% in June and 29% year over year. However, there was a negative revision to May’s figures and when taking this into account, the gain in June is really 4.5%. Starts for single-family homes, which are in such demand from buyers, were also up 6.3%.
While the increase in Housing Starts is a good sign, the decrease in Building Permits (which are a good forward-looking indicator) is concerning. Permits were down 5.1% from May to June, but they are 23% higher year over year. Permits for single-family homes also fell, unfortunately, dropping 6.3%.
Homes authorized but not started are up almost 60% year over year and this figure continues to climb, which shows us there are delays due to higher costs and labor issues. Single-family units completed are down 6% from May to June and 3% year over year. This speaks to the fact that builders can’t get appliances, which is another factor that’s delaying the completion process.
Overall, this was a mixed report. While higher Housing Starts in June will eventually lead to a little more supply once these homes are completed, looking beyond this, Permits are lower and supply constraints appear that they will be in place for quite some time. This should continue to be supportive of home price appreciation.
Builder Confidence Ticks Lower But Still Strong
Builder confidence moved lower in July, as the National Association of Home Builders Housing Market Index fell one point to 80. While this index has been declining, a reading above 50 signals expansion and 80 is still a very strong level. The month of July is typically slower due to seasonality and there was also a heatwave that may have deterred some traffic.
Of the three components of the index, current sales conditions fell one point to 86, sales expectations for the next six months rose two points to 81, and buyer traffic dropped six points to 65.
The high demand for homes helped offset some of the challenges builders are facing, as NAHB Chairman Chuck Fowke noted that, “Builders continue to grapple with elevated building material prices and supply shortages.”
The Housing Bubble Debate
Given how hot the housing market has been, you may have heard talk of a housing bubble in the media. Let’s break this down and analyze what causes a housing bubble.
In typical bubble-like conditions, like we saw during the last housing bubble, there is a decline in demand and a large amount of supply. Back in 2007, there were roughly 3.7 million homes for sale and not enough demand to sop up that supply.
If we fast forward to today, we have some of the tightest inventory ever, with only 1.2 million homes for sale. Additionally, demand is extremely strong and increasing due to demographics. When we look at supply and demand now compared to 2007, there are 12 million more households (demand) and 2.5 million fewer homes.
In fact, because there is so much demand and such a backlog, the country’s largest homebuilder, D.R. Horton, is pulling back on order activity to allow housing’s strained supply chain an opportunity to catch up with demand. In other words, there is so much demand that they have to purposely slow down building, as they don’t have enough supply of materials, labor and appliances.
While the pace of appreciation has been hot, and this may slow in the coming months, there is a big difference between slower home price growth and declines in prices. Plus, even though buying a home can be challenging right now, renting comes with its own challenges, including rising rental prices across the country. That’s why it’s so important to understand the current market dynamics when it comes to talk of a housing bubble.
Initial Jobless Claims Rise Yet Evidence of Improvement
Initial Jobless Claims moved in the wrong direction in the latest week, as the number of people filing for unemployment benefits for the first time increased 51,000 to 419,000. California (+58K), Texas (+44K) and Pennsylvania (+38K) reported the largest number of claims.
However, the number of people continuing to receive regular benefits decreased 29,000 to 3.2 million, which is a post-pandemic low.
Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) fell by 1.1 million combined, which is a significant improvement.
There are currently 12.6 million people still receiving benefits throughout all programs, which is down 1.3 million from the previous week. We have seen this number decline by roughly 2 million over the past three weeks. While this data is lagging due to the time it takes people to find employment, and then for the reporting to occur, it does appear that we are seeing the impact from some of the states that have cut extra benefits ahead of the Labor Day expiration.
What to Look for This Week
Housing news continues in this week ahead, beginning Monday with June’s New Home Sales. Tuesday brings an update on home appreciation via May’s Case-Shiller Home Price Index and the Federal Housing Finance Agency House Price Index, while Pending Home Sales for June follow on Thursday.
Also on Thursday, the latest weekly Jobless Claims figures will be reported along with second quarter Gross Domestic Product.
On Friday, critical inflation data will be delivered via the Fed’s favored measure of inflation, Personal Consumption Expenditures, along with Personal Income and Spending for June.
Plus, the Fed’s two-day meeting of the Federal Open Market Committee begins Tuesday, with the Monetary Policy Statement following on Wednesday, and this always has the potential to move the markets.
Technical Picture
Mortgage Bonds are trading in a wide range between support at 101.453, which has held the last several times tested, and overhead resistance at the 200-day Moving Average. The 10-year is testing an important ceiling at 1.29%. If yields break above this level, they will likely move towards 1.37%, which can cause Mortgage Bond prices to move lower.
