KEY DATA: Sales: +4.3%; Prices (Over-Year): +5.3%
IN A NUTSHELL: “With demand for housing so strong and supply so low, it is likely we will see housing starts rise for quite a while.”
WHAT IT MEANS: Last week, the housing starts reports indicated that construction was down in January. But I commented that was likely to be a temporary decline as permit requests soared. Today’s January new home sales numbers support the view that home construction should continue to support the recovery. Demand was up solidly, with only the Northeast reporting a decline. The level of sales moved back to the robust pace posted in the summer and early fall, when the “get me out of the city as soon as possible” movement was at its greatest. In addition, the December number was revised upward sharply, indicating that there really was no major softening in the market. What is remarkable is that sales are so high given that the supply of homes on the market remains at some of the lowest levels we have ever seen. Indeed, we are pretty close to the lowest points posted during the housing bubble.
As for home prices, they are still rising solidly. When it comes to the median price of new homes, the change is very dependent on what segment of the market is getting the most attention from home builders. Most of the other home price indices are rising near or at double-digits. Yesterday, the Case-Shiller National Home Price Index report showed another surge in December and for the year, were up 10.4%. The Federal Housing Finance Agency’s monthly purchase index rose 11.4% between December 2019 and December 2020. IMPLICATIONS:Strong demand, a shortage of supply and rapidly rising prices is the perfect combination of factors that should convince builders that now remains a really good time to get the shovels in the ground. Indeed, the surge in permit requests makes it clear that residential construction, which has been a key driver of the recovery, will continue to lead the way for quite a while. About the only concern on the construction horizon is mortgage rates.They have started rising but have yet to reflect the increases in longer-term rates. They should increase going forward, though I don’t expect any gap up in mortgage rates as the decline didn’t reflect the absurdly low levels seen last summer in the Treasury markets. That doesn’t mean the pathway will be smooth. There was pretty decent weather in December and January, but February has been brutal – and it wasn’t just a Texas thing. So, don’t be surprised if the February housing numbers look ugly. By when the spring weather kicks in, sales and starts should improve. We also have to recognize that the December stimulus funds are showing up in household bank accounts and that should help consumer spending. And, of course, the next stimulus bill is still on track to be passed by mid-March, which would boost consumer finances even more. As long as Uncle Sam the Candy Man keeps funding the sugar high the economy is on, growth should remain quite strong. Assuming President Biden gets most of what he is wants in the next stimulus bill, it is hard to forecast anything but clear sailing for most if not all of this year.