Economic Forecasts

Real Estate: Home Prices Show No Signs of Cooling Off

Kiplinger’s latest forecast on housing starts and home sales

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Housing starts rebounded in August, thanks to a surge in multifamily construction. Total housing starts rose 3.9% to 1.615 million annualized units. Multifamily starts soared 20.6%. Demand for apartments has been unexpectedly strong and rents have risen, giving builders confidence to move forward with more projects. Conversely, single-family starts were down 2.8%. The single-family market is experiencing shortages in essential building materials and skilled construction workers. Shortages of lumber, appliances and other building materials have led many builders to limit the number of homes they start. Even with these headwinds, single-family construction is maintaining a fairly strong pace this year.

New-home sales rose for the second consecutive month in August. Sales of new single-family homes increased 1.5% to a seasonally adjusted rate of 740,000. Sales rose in the Northeast, South and West, but declined in the Midwest. The pace of new-home sales has moderated substantially after peaking in the third quarter of 2020. A lack of inventory in the existing-home market is pushing some prospective buyers to the new-home market. At the current sales pace, it would take 6.1 months to run out of the supply of new homes for sale. Inventory of new homes improved again in August. The total number of homes for sale rose 3.3%. Much of that inventory gain, however, came from new homes that have not yet been started or homes that are still under construction. Prices are still rising rapidly. On a year-over-year basis, the median new-home price rose 20.1% to $390,900.

Existing-home sales fell as booming prices shut out some home buyers, declining 2% to a seasonally adjusted 5.88 million units. Sales are down 1.5% compared with a year ago, but they remain above their pre-COVID 19 level of around 5.35 million units. The inventory of homes available for sale fell 1.5% from the previous month and is down 13.4% from a year ago. The supply of relatively affordable homes is particularly tight, with those priced under $250,000 representing just 30% of sales. Despite elevated prices and lean inventories, demand is still robust, and homes that do hit the market continue to sell very quickly. Properties listed for sale typically remained on the market for 17 days in August 2021, down from 22 days in August 2020. Almost 87% of homes sold in July were on the market for 30 days or less.

House prices continue to reach new records. The S&P CoreLogic Case-Shiller National Home Price Index rose 19.7% in July from a year ago. With inventories of existing homes still very low, prices have risen steadily for 12 consecutive months, and they’re not showing any signs of a substantial slowdown. Housing demand, however, will cool over the next few months as the surge in house prices weighs on home buyer sentiment. Mortgage rates are likely to increase over the next few months, and that will cut buyers’ purchasing power, too.

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