2 Significant Headwinds for Housing’s Growth

NAHB Chief Economist Robert Dietz recently provided this housing industry overview in the bi-weekly e-newsletter Eye on the Economy.

New single-family home sales in June declined 6.6%, falling to a 676,000 annualized rate. Although new home sales are 13.5% higher on a year-to-date basis compared to 2020, the June data marked the third consecutive monthly decline.

The reasons why sales have softened since the end of 2020 have generated an ongoing debate in the media.

Some have noted that builders are limiting sales because of a lack of inventory and higher construction costs. Others claim that higher home prices (new home prices are up 10% since January 2020) have priced many buyers out of the market.

Both of these claims have merit. Supply-side factors (particularly materials, labor and lots) are holding back housing supply, with ready-to-occupy new home inventory down 44% over the last year to just 34,000 homes.

Moreover, NAHB survey data indicate buyers’ perceptions of housing affordability are waning, and rightfully so: The share of buyers who can afford less than half the homes available for sale worsened from 63% at the end of 2020 to 71% by midyear.

During the second quarter, pricing was the No. 1 reason active buyers did not make a home purchase. Given higher construction and development costs, and the potential for higher interest rates in the coming years, these variables are worth watching.

Meanwhile, multifamily rental demand is growing and the apartment construction market is expanding.

Ultimately, higher interest rates will depend on the pace of economic growth and the future of monetary policy in an environment with growing uncertainty. Second quarter GDP growth came in at a somewhat lower-than-expected rate of 6.5%. NAHB is forecasting continued economic growth in 2021, resulting in an overall growth rate just below 7% for the year, which would mark the best rate since 1984.

However, because of choppy conditions, including concerns over the delta variant, the Federal Reserve continues its dovish approach to monetary policy.

For its July meeting, the Fed held the federal funds rate near a zero rate and did not provide guidance on a future tapering of Treasury and mortgage-backed security (MBS) purchases. Fed Chairman Powell notably stated that when a taper does occur (which we expect will happen this fall), the reduction of MBS purchases will not occur without a reduction for Treasuries as well.

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