06/01/2020

Eye on the Economy

Promising Signs for Housing

As much of the U.S. economy reopens in the midst of mitigation efforts related to COVID-19, some sectors have the potential to rebound faster. The NAHB forecast is based on housing being a leading sector in the recovery due to the fact that housing was underbuilt entering into this government-imposed recession and low-interest rates will help support demand. In fact, while most metrics are down, recent data show the housing market is doing better than expected. A key question now is whether recent, relative strength represents a temporary bounce-back due to pent-up demand or the foundation on which the economy can build during the summer.

The benchmark measure of builder confidence, the NAHB/Wells Fargo Housing Market Index (HMI), rebounded in May, increasing seven points to a still negative reading of 37. The gain in May nonetheless pointed to improvements for housing starts ahead, with April being a low point for the current recession. Single-family starts were down 25% in April from March, declining to an annualized rate of 650,000. The April level marks the slowest annualized pace since 2015 and is off 37% since the strong rate recorded in February. The strength of the early 2020 data means that even with recent declines, single-family starts remain 1% higher for the first four months of the year compared to the first four months of 2019. 

The NAHB Multifamily Production Index (MPI) showed a 22-point drop in the first quarter, falling to a negative reading of 27. This reading of the MPI is consistent with declines for the multifamily forecast as job losses mount. Indeed, multifamily starts declined 40.5% in April to a 241,000 annualized rate. This represents a 62% decline from the peak January rate. A recovery for apartment construction will depend on the pace of job restoration as economies reopen. 

Existing home sales, as estimated by the National Association of Realtors, experienced the largest decline in 10 years. Despite a monthly drop of 18% in April, current inventory remains tight at only a 4.1-month supply. Pricing actually accelerated with a 7% year-over-year gain, which is another indicator of the potential gains for housing. Surprisingly, and as another encouraging sign, sales of newly-built single-family homes were essentially flat from March to April at an annualized pace of 623,000. Inventory was at a relatively healthy 6.4-month supply in April, while pricing dropped 8%.

A positive indicator from the Mortgage Bankers Association found that mortgage applications for home purchases have increased for six straight weeks, marking a 54% gain since the low point in April. All together, the data show a housing market that experienced declines in March and April, but for which considerable pent-up housing demand is waiting to be unlocked. Risks remain, however, including whether recent demand improvements are merely temporary and whether new rounds of lockdowns are in store for the fall. And in the short-run, as the economy reopens, recent job losses (now totaling more than 38 million) will need to be reversed.

–NAHB Chief Economist Robert Dietz