Where Are We Going?

Is Housing Demand Slowing Down?

By: Charles C. Shinn Jr., PhD
President, Builder Partnerships

The housing industry was on fire last year. Following the pandemic shutdown in early 2020, housing experienced a very strong “V” shaped recovery as shown in the charts accompanying this article. Since the beginning of 2021, the housing data seem to suggest that demand has been softening. However, it appears to be more of a supply problem than a demand problem.

Existing home sales in July were at a very strong annual rate of 5.99 million homes, up 1.5% from last year’s rate. The typical home was on the market for only 17 days which was down from 22 days last year. Eighty-nine percent of homes were on the market for less than a month.

The median sales price for existing homes increased 17.8% from a year ago which may have caused some sticker shock for the home buyer. The increase in median sales price is due to strong housing demand and lack of inventory. At the beginning of this year, the existing home inventory had dropped to 1.9 months of supply. Since then, it has risen to 2.5 months of supply which is still very tight compared to the normal rate of about 6.0 months of supply.

Home builders have been having a difficult time supplying needed housing to meet demand and they have a large backlog of sales. After the shutdown, there was a huge spike in lumber pricing and reduced availability of other building materials and labor. These issues have extended construction schedules and caused builders to ration sales and not market homes under construction until frame completion. Many builders are only taking reservations for home sale releases which are established by the builder’s anticipated production capacity, lot inventory, and current construction costs.

Looking at the charts for new construction, we see that new single-family home permits have increased so far this year by 29.2%, while single-family housing starts rose 27.2%, and completed homes only increased 8.3%. Since the beginning of the year, for sales inventory has increased to 6.2 months of supply which is adequate for the sales volume. However, in looking at the makeup of the inventory, the not started inventory has increased 84.2% since last year, under-construction inventory has increased 29.9%, and completed inventory has dropped 38.2%. This reveals the problem builders are having to meet housing demand.

To date, new home sales this year are ahead of last year by 6.9%. This could be an understatement of housing activity, since builders are taking reservations from buyers for the opportunity to buy a home in future releases and trying to reduce their backlog of sold homes still in the construction pipeline. The median sales price for a new home has increased 18.4% since last year which is slightly more than the increase for existing homes.

At this point, the housing market is still strong. With the stimulus money, the consumer has the resources to buy a home. The interest rate for a 30-year fixed rate mortgage is still near record lows at 2.87%. The dark cloud on the horizon for housing is the potential runaway inflation caused by excessive economic stimulus which will continually push housing prices higher. As a result, the Federal Reserve will be forced to raise interest rates to stem inflation which will increase mortgage interest rates. This will impact housing affordability and effective demand.

Updated: September 30, 2021
(August 2021 Data)

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