The housing market continues to be one of the bright spots of the coronavirus recession economic recovery. The National Association of Realtors® reported that during September existing home sales hit a 14-year high, and in the process pushed median home prices to record highs and pulled home inventory supply to a record low. Working from home and low mortgage rates are driving demand for housing in an otherwise uneven economic recovery. Housing-related companies have been the benefactors and are ramping up to make the most of the opportunity.
On Thursday, the National Association of Realtors® (NAR) released September data showing just how hot the housing market recovery has gotten. Total existing home sales rose 9.4% from last month and 20.9% from one year ago to a seasonally adjusted annual rate of 6.54 million. This was the highest rate of sales since the pre-subprime mortgage crisis days of 2006.
The national median home sales price rose to $311,800, which is 14.8% higher than one year ago. Sales prices are also buoyed by sale inventories falling to their lowest level since NAR started tracking the data point in 1982. There is currently only 2.7 months’ worth of housing inventory supply available at the current rate. All of those metrics exceeded consensus expectations.
Some of the heat can be attributed to pent-up demand. Existing home sales are counted at the close of escrow, which puts the original contract date back to July and August. As you may note in the chart above, existing home sales cratered in the depths of the coronavirus pandemic during March and April, so a certain amount of snapback was inevitable. However, to recover to peak levels while unemployment levels are still elevated is noteworthy.
The housing boom may also speak to another dynamic that we are seeing during this pandemic (and now recovery) period – the changing composition of household spending. One of the clearest examples is consumer spending on durable and nondurable goods vs. services. The service sector economy skews towards high direct contact with people, and therefore has COVID-19 constraints and shortcomings. As people continue to shy away from travel and recreational services due to health concerns, sales of goods benefit as consumers shift their spending from services to products.
On the housing front, consumers are spending more on home improvements. Lowes and Home Depot reported revenue increases of 30% and 23% respectively last quarter. And the September sales figures show strong housing demand with a couple of trends. Detached single-family homes sales outpaced condominium sales 9.7% to 6.3% for the month and 21.8% to 13.6% over the last year, possibly showing a search for more square footage in the work-from-home era. Also, sales in vacation and resort areas were up 34% from one year ago, as more people embrace the ability to work remotely from a preferred destination rather than an urban area.
Last, residential real estate will always be an interest rate sensitive sector of the economy. The 30-year fixed rate mortgage average dropped below 3% in mid-July and has remained at historically low levels, providing home buyers more purchasing power.
We should note that interest rates may be displaying some bottoming activity based on US Treasury yields. The Federal Reserve has been steadfast in their support of zero-interest rate policy and continue to buy US Treasury bonds, which should apply pressure to the front end of the curve. However, the 10-year Treasury note yield closed at 0.84% on Friday, which is up from 0.55% at the end of July, and similarly, the 30-year Treasury bond yield is back up to 1.64% from 1.20% at the end of July. Mortgage rates have not ticked up yet, but that is something to watch in the next few weeks.
The question is how far can this housing run continue based on record low inventory?
Construction is trying to catch up to demand. Single-family housing permits and starts have risen substantially to not only pre-COVID highs, but decade-plus highs. The number of homes under construction per permit is the one of the lowest ratios on record, which suggests that a lot of housing should come on-line within the next few months. The estimated construction completion time is approximately 7 months, which means a lag during a surge of demand.
Given the strength in the housing market recovery, homebuilders, building products suppliers, home improvement retailers, and home furnishings retailers are all outperforming the broader stock market year-to-date. As long as the housing market remains under-supplied, these housing-related industries and companies are in a great position to take advantage. Location, location, location.
Have a great Sunday!
Timothy W. Ellis, Jr., CPA/PFS, CFP®
Senior Investment Strategist, Wealth Strategist