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Economic Forecasts

Housing Market Revived in May

Kiplinger's latest forecast on housing starts and home sales

The COVID-19 pandemic and resulting lockdowns have severely curtailed the ability of many Americans to buy homes, as layoffs and reduced hours hurt household incomes. Residential construction also slowed as homebuilders grew cautious amidst the slump in demand. Yet despite the effects of the pandemic, the market is showing early signs of a recovery.

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Residential construction rose in May, after falling by double digits in both March and April. Housing starts rose 4.3% to 0.974 million annualized units in May, following a 26.4% drop in April. Total starts are still about 40% below January’s peak of 1.6 million. Single-family starts rose 0.1%, while multifamily starts rose 15% in May. A sizeable gain of 14.4% in building permits indicates that residential construction will pick up in coming months.

New-home sales are already showing signs of recovery. After falling 25% during the previous three months, new-home sales rose 16.6% in May to a seasonally adjusted rate of 676,000. Sales rose in all regions except for the Midwest. The inventory of new homes for sale in May declined for a second month in a row. There were 318,000 new homes for sale in May – 5.6-months’ supply at the current sales pace. The share of new homes sold priced below $300,000 rose to 47% in May from 50% in the previous month. The construction backlog also jumped. Sales of homes where construction had not yet started accounted for 27% of total sales over the month, up from 22% in April. 

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Existing-home sales will rise over the next few months after bottoming out this spring. Sales of existing homes fell 9.7% in May to a seasonally adjusted rate of 3.91 million. Compared with a year ago, sales are down 26.6%. Sharp declines were reported across all regions, although the Northeast and the West were hardest hit. While more states began to ease stay-at-home orders and restrictions on business activity, many potential buyers stayed on the sidelines amid turmoil in the labor market. On a year-over-year basis, total inventory was down 19.5% -- the eleventh consecutive decline. Despite the bad news in May, other data seem to indicate that housing demand has turned the corner and that June will turn out be a better month for home sales. Mortgage purchase applications have risen steadily in recent weeks and have regained much of the ground lost at the beginning of the pandemic.

Home prices continue to rise steadily despite a slump in home sales. The S&P CoreLogic Case-Shiller National Home Price Index rose 4.7% in April from a year ago, up from 4.6% in March. This was the tenth consecutive month of year-over-year increases. Prior to the outbreak, house price fundamentals were strong as healthy demand for housing and lean inventories pushed up house prices. That trend should continue as demand comes back from its spring decline and inventories remain low.

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