Real Estate: Housing Market on Strong Footing Despite Slowdown

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The housing market remains on strong footing, but the pace of recovery is slowing. Pent-up demand played a key role in the rebound last year. In recent months, however, tight inventory and higher home prices have slowed down home sales.

Residential construction decreased in July. Total housing starts fell 7% to 1.534 million annualized units. At 1.11 million annualized units, single-family starts were down 4.5%, while multifamily starts fell 13.1%. Building permits rose 2.6% and remain strong. Yet inventories of completed new homes remain near record lows. Shortages of lumber, appliances and other building materials have led many builders to limit the number of homes they start. Even with these headwinds, the industry is on pace to have its best year in over a decade.

New-home sales rose slightly in July after a run of declines. Sales of new single-family homes increased 1% to a seasonally adjusted rate of 708,000. Sales rose in the West and South, but declined in the Northeast and Midwest. Low inventories and rapid increases in prices in recent months have led many potential buyers to put their plans on hold. The pace of new-home sales has moderated substantially after peaking in the third quarter of 2020. Inventories of new homes for sale soared in July to their highest level since 2008, but this was driven by a sharp rise in homes for sale that haven’t been started yet. At the current sales pace, it would take 6.2 months to run out of the supply of new homes for sale. Less than 10% of this inventory consists of completed units. About 30% of these houses were not yet started, and 63% were under construction in July.

Existing-home sales rose for the second month in a row, up 2% to a seasonally adjusted 5.99 million units. The recent dip in mortgage rates, along with a rebounding labor market, have contributed to a pickup in home sales over the past couple of months. The inventory of homes available for sale rose 7.3% from the previous month, but it is still down 12% from a year ago. With inventory at record lows, a sustained resurgence in sales is unlikely. Despite elevated prices and lean inventories, demand for homes is still robust. One of the indicators of strong demand is that homes continue to sell very quickly. Homes typically remained on the market for 17 days in July 2021, down from 22 days in July 2020. Almost 89% of homes sold in July were on the market for less than a month.

House-price growth is set to slow over the second half of the year. The S&P CoreLogic Case-Shiller National Home Price Index rose 18.6% in June from a year ago. With inventories of existing homes still very low, house prices have risen steadily for 11 consecutive months, as surging demand has put upward pressure on home values across the nation. Housing demand will moderate over the next few months because the surge in home prices has weighed on home buyers’ sentiment. Indeed, mortgage applications have fallen back to their lowest level since the spring of last year. Fannie Mae reported that the share of households thinking now is a good time to buy hit a 10-year low of 28% in June. While mortgage rates won’t see a significant rise this year, lenders are unlikely to substantially loosen credit conditions for home buyers, and that will limit how much they can bid up prices.