The housing market remains resilient. While conditions appear to have moderated during the late summer, some indicators are rising again, to the dismay of prospective buyers. Still, last week’s data was mixed, and the housing market can go in any direction from here. Tailwinds from continued robust demand are battling headwinds due to shortages of labor and rising prices of materials.
On the “powering forward” front, the National Association of Realtors reported that existing home sales grew by 7% in September over the month on a seasonally adjusted annualized basis, the fastest rate since January and a reversal of the slide in August sales that were affected by severe weather conditions in the Southeast. Sales were down year over year, but that reflects the uncharacteristic year we had in 2020 when the pandemic disrupted seasonal patterns.
Adding to that evidence, new home sales rose by 14% in September to a seasonally adjusted annual rate of 800,000, according to the Census Bureau , far better than expected. Downward revisions were made to the July and August sales figures, but that does not detract from the evidence of sustained strong demand at the end of the third quarter. The report continues to suggest supply-side constraints on builders, as about one-third of homes sold were not yet under construction.
Median prices for new homes reached a record high of $408,000 in September (not seasonally adjusted), an 18.7% increase over the year and 1.8% over the month.
This sits in contrast to the median home price for existing homes reported by the Realtors association, which edged lower by 1.4% in September over August, the third consecutive month of falling prices. However, that might be due to what is known as composition effects, as higher-priced properties tend to sell during the summer months and the few home sellers remaining with unsold listings in the fall are more likely to reduce their listing price. Over the year, the median price for existing homes was 13.3% higher than a year ago. While still high, that was the slowest year-over-year rate of growth since December 2020.
With most schools reopening for in-person learning and many workers returning to the office, seasonality appears to be returning to the housing market. The supply of existing homes for sale fell in September to an equivalent of 2.4 months of sales, according to the Realtors association. Low levels of inventory have characterized the housing market since the onset of the pandemic. It is possible that inventory could increase as mortgage forbearance plans come to an end. Analytics firm Black Knight reported that 400,000 mortgage holders exited forbearance plans in the first two weeks of October and 1.2 million mortgages are 90 or more days past due, but not yet in foreclosure. However, equity gains in just the past two years have been significant and mortgage rates remain historically low, making it possible for many homeowners to refinance into more affordable terms.
Still, homeowners are apparently not flocking to this strategy. According to the Mortgage Bankers Association, the refinance-only index fell by 7.1% in the week that ended on Oct. 15 and was 22% lower than in the same week one year ago. This has been on a downward trajectory since mid-July despite falling mortgage rates.
Meanwhile, the purchase-only index suggests that demand could be cooling. The index decreased by 4.9% in the week that ended on Oct. 15 from the week earlier and was 12% lower than in the same week the previous year. The bankers association attributed an uptick in the 30-year fixed rate as one of the reasons why applications fell during the week.
Nonetheless, homebuilders remain optimistic about the market for new homes. The National Association of Home Builders' Housing Market Index increased to 80 in October from 76 in September, far higher than the 50 threshold that divides homebuilder sentiment from poor to favorable market conditions. The index showed increased buyer traffic, one of the components that had been a drag on the index in recent months. Still, homebuilders did express concerns that supply-chain disruptions, the still-high costs of materials and labor shortages are forcing higher home prices and longer lead times, which, together with mortgage rates creeping higher, are eroding affordability.
Despite their continued optimism, housing starts fell in September, entirely due to a fall in apartment building starts. Building permits plunged by 7.7%, also due to a pullback in the multifamily sector. Not to worry: As we’ve often noted, builders sit on a backlog of permits waiting to start construction, likely adding to their optimism. Less than 10% of new homes available for sale at the end of September had completed construction.
A Brief Note on the Rental Market
Data from Apartments.com and CoStar’s other marketplaces allows us to create a robust daily rent series for apartments. As noted in our latest apartment state of the market update, demand rose sharply from a year ago, leading to double-digit rent growth from a year earlier. In fact, net absorption year to date has topped 665,000 units — 40% more than last year or any other full year since 2000. Yet apartment renters are now starting to show some signs that they are reaching their limits. In September, rents grew by just 0.4% — the slowest pace since December of last year — and October gains will likely end up lower, if not negative, based on where we are today. The National Multifamily Housing Council’s Rent Payment Tracker is also showing softening in rent collections for the full month of September and the first week of October.
What We’re Watching …
Data on pending home sales in September, which are new contract signings, will complete the September series of housing market data. Pending sales lead closings by about four to six weeks and are an early indicator of October housing activity. With housing demand still strong, pending sales could well continue to climb, but with housing prices rising faster than wages and mortgage rates inching higher, eroding affordability could well be a restraint on exuberant buying activity in the fourth quarter.
The government is set to report its summary of third-quarter economic growth on Thursday. The spread of infections from the delta variant of the coronavirus caused a slowdown in economic activity in the third quarter, with consumer spending weaker and investment slowing. Forecasters are expecting the quarter to have grown anywhere from 0.9% to 2.5% annualized, slower than initially expected and a far retreat from the robust 6.7% growth in the second quarter.
Data on personal income and spending for September is scheduled to be released on Friday. Incomes are projected to have contracted as the expanded federal unemployment benefits expired, while spending should have risen as retail sales reported earlier in the month were quite strong. That would bring the savings rate lower, but that is still high compared to pre-pandemic days.
Friday will also give us the latest read on inflation. The core personal consumption expenditures price index should show some moderation over earlier gains, but the year-over-year number is likely to remain high. The headline price index should move higher because of higher food and energy prices in the month.