Connecting the dots


Housing has been on a roll since last summer when the spring buying season finally emerged. The result is a decimated inventory, sky-high prices and no end in sight. But before coming to a conclusion, let’s connect the dots.

Existing Homes – Existing home sales decreased for the fourth straight month in May to an annual rate of 5.8 million reflecting a deceptive 44.6% year-over-year increase (due to COVID-depressed sales activity). The experts believe lack of inventory to be the overwhelming factor for the four-month inertness but there are other factors at play.

Total housing inventory at the end of May stood at 1.23 million units. While down 20% year-over-year, it was up 7.0% month-over-month to a nevertheless slim 2.5-month supply, based on the current sales pace.

Properties typically remained on the market for just 17 days in both April and May, down from 26 days in May 2020, and 89% of the homes sold this May were on the market for less than one month compared to a similar percentage (88%) in April suggesting stable demand.

That said, the Redfin Homebuyer Demand Index showed a drop of 1% year-over-year for the week ending June 20th taking it below 2020 levels for the first time in 2021 and bringing it down from its high point of 18% achieved in the week of March 28th. Further, the Mortgage Bankers Association Home Purchase Index declined 11% since March 24th and pending home sales were reportedly down 10% from the 2021 peak (May 30th.)

The culprit appears to be price. The median existing home price for all housing types in May was $350,300, up 2.5% month-over-month and 23.6% year-over-year. And by the week ending June 20th Redfin reports that the median home sale price had reached a record level of $361,750.

The most active price bracket in the month of May was $250,000 to $500,000 accounting for 42% of existing home sales, reflecting an increase of 47.9% year-over-year. This bracket was followed by $100,000 to $250,000 accounting for 26% of sales, reflecting downward momentum of 1.7% from a year prior and the continuous constraint of inventory in this price range.

For perspective, the $500,000 to $750,000 price range exhibited a 121.7% y/y increase; the $750,000 to $1.0 million range exhibited a 178% increase and the $1.0M+ category increased a whopping 244.5% year-over-year in May.

According to ATTOM’s Q2 Home Affordability Report, the trend toward declining affordability continues to gain traction with median home prices less affordable than historical averages in three of five U.S. counties as home prices outpace wage growth. This has resulted in ownership costs consuming 25.2% of the average national wage ($63,986) in Q2, up from 22.7% in Q1 2021 and representing the highest ratio since Q3 2008. While still within lending parameter norms (28%) it is precariously close and rising.

While location plays a role in the degree of home value-to-income disparity, the trend is a national one. On a regional basis, year-over-year price increases ranged from 17.1% in the Northeast, to 18.1% in the Midwest, to 22.6% in the South and 24.3% in the West, which, counter-intuitively, also saw a 61.6% increase in the number of existing home sales, the highest of all regions. In comparison, the average rate of sales growth was 45.7%.

In the Seattle metro area, an astounding 580 homes have sold for $300,000 or more above their asking prices so far in 2021. According to Redfin, 4,078 homes in Seattle have sold for $100,000 to $299,999 above asking price and more than 6,300 have sold for $25,000 to $99,999 above asking price. The median home sales price in Seattle rose 26.1% year-over-year to a record $737,800 in May and more than 74% of Redfin offers faced bidding wars while the typical home sold in just five days.

New Homes – Sales of new single-family houses in May 2021 were at a seasonally adjusted annual rate of 769,000, 5.9% below the revised April rate but 9.2% higher year-over-year. Home sales increased in two of the four regions, growing 33% in the Northeast and 6.7% in the West. New home sales were flat in the Midwest and down 14.5% in the South.

The majority of houses sold were under construction, and the number of new homes sold that had not yet started construction was up 76% year-over-over-year in May.

The inventory of completed homes for sale stood at just 36,000 in May, representing 15 to 16 days of spec inventory. Ready-to-occupy homes have continued to fall as a share of the new home inventory and now stand at about 11% compared to 24% one year prior.

The seasonally adjusted estimate of all new houses for sale at the end of May was 330,000 representing a 5.1-month supply at the current sales pace. Based on past performance, as we approach the 6.0-month supply mark, expect builders to slow the pace of construction even further.     

The median sales price of new houses sold in May 2021 was $374,400 reflecting an 18% year-over-year increase. The average price exhibited a similar growth characteristic (+17%) at $430,700.

The most active price range for new home sales was $300,000 to $399,999. In May, just one in four new homes for sale (25%) was priced under $300,000. This compares to 44% in May 2020.

Building material costs and labor shortages continue to shoulder the blame for the sluggishness and increased costs/pricing associated with new home building.

So let’s connect the dots:

Low inventory = Higher prices
Higher prices = Lower demand
Less Demand = Slower building
Slower building = Lower inventory
Lower inventory = Higher prices

Looks like a circular firing squad.


Following the trends . . .

Under the “New Residential Construction” portion of the most recent Current Climate column, we noted that construction activity appeared to be in seasonal moderation in April. To recap: building permits stood at 1.76 million for a 60.9% year-over-year increase; housing starts were at 1.569 million, up 67.2% year-over-year; and, housing completions were at an annual rate of 1.449 million for a 21.7% y/y jump. However, all indicators reflected comparisons to a bleak 2020 in which COVID-19 ruled. On a month-over-month basis, all were either flat or down, hence the seasonal moderation observation.

Based on May activity, the observation appears appropriate. Building permits in May dropped to an annual rate of 1.681 million, down 3.0% month-over-month and just 34.9% above the May 2020 rate, reflecting a decrease of 26 percentage points, while housing completions dropped to an annual rate of 1.368 million, down 4.1% month-over-month and representing a 16.1% year-over-year increase for a 5.6 percentage point loss. However, while housing starts exhibited a 16.9 percentage point decline in growth year-over-year, on a month-over-month basis starts were up 3.6% to an annual rate of 1.572 million units.

Coincidentally, homebuilder confidence fell to its lowest level since August 2020 by June, to a reading of 81 for single-family homes, reportedly due in part to material shortages. However, the hypothesis doesn’t really sync with the increase in housing starts. Something to keep an eye on.

Further, at this writing Bloomberg reports that lumber prices posted the largest-ever weekly decline as sawmills ramped up output and buyers held off on purchases. Prices in Chicago fell 18% during the week of June 11th and according to the report, lumber futures have now dropped nearly 40% from the record high reached on May 10th.

In the Mortgage Activity portion of the Current Climate column, we reported on the week ending May 21st, when, after two weeks of increases, mortgage applications had dropped 4.1%, followed by two more weeks of declines. But what goes down, eventually goes up and applications did increase 4.2% in the week ending June 11th.

Nevertheless, purchase applications were down 17% from a year ago mid-month, theoretically due to mortgage interest rates that stubbornly hover above the 3%+ level.

Stay tuned . . .



In the most recent edition of BMB, we had the pleasure of announcing the inaugural Meyer’s Research LLC New Home Pending Sales Index. The index, published mid-month, showed a significant 14.3% increase in new home sales, year-over-year.

Two weeks later, the National Association of Realtors (NAR) Pending Homes Sales Index (PHSI) was published, showing a much lower 7.4% year-over-year increase. The disparity between the two piqued our interest, so we began to dig.

In addition to a two-week swing in publication dates, the primary distinction between the two indices is, obviously, the product analyzed. The Meyer’s NHPSI measures new homes under contract while the NAR PHSI measures existing home pending transactions.

A comparison of the two indices suggests that new construction is being welcomed by the consumer, translating to stronger building activity. Privately-owned housing units authorized by building permits in December were at an annual rate of more than 1.4 million for a 6%+/- year-over-year increase, while housing starts came in at more than 1.6 million, reflecting a whopping 40.8% y/y increase. In both cases, approximately two-thirds of the activity was for single-family homes.

Zillow reports that there were more than 120,000 fewer homes for sale at the end of the year, reflecting a 7.5% year-over-year decline. Low for-sale housing inventory has become the bane of our industry’s existence as household formations have far outpaced housing starts for several years now, resulting in potential first-time buyers becoming renters. Estimates show more than 123 million household formations as of September 2019, while the average number of single-family housing starts has hovered just above 820,000 for the last five years, suggesting a shortage of more than 400,000 units per year, on average.

New home construction activity is a prerequisite to our industry’s health. Just 3.5% of all U.S. housing units have been constructed since 2014 and approximately two-thirds of standing inventory is more than 30 years old, suggesting a significant amount of both functional and economic obsolescence.  So . . . let’s keep those housing starts coming!