Affordability Headwinds Will Increase

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

While the housing market is showing signs of stabilizing after a period of cooling, housing affordability will decrease in the quarters ahead. Home prices are up more than 30%, on average nationwide since the start of 2020. And interest rates will rise as the Federal Reserve tightens monetary policy.

Indeed, the 10-year Treasury rate has increased 37 basis points since the start of August. And consumer confidence declined to a seven-month low in September because of virus and inflation concerns. The prospect of higher taxes is certainly having a negative impact as well.

Recent housing market data, however, have shown stability. The NAHB/Wells Fargo Housing Market Index (HMI) increased one point in September, rising to a level of 76. The index is off a data series high of 90 from last November.

Housing starts increased in August because of strength for apartment construction. Multifamily starts are up almost 17% on a year-to-date basis thus far in 2021 as a rebound for the rental market has taken hold. Single-family starts were down 2.8% for the month and seem to have found a sustainable pace of approximately 1.1 million per year. Nonetheless, the surge in single-family construction at the end of last year means that for the first time since 2013, there are now more single-family homes currently under construction than individual apartments.

Existing homes sales, as reported by the National Association of Realtors, decreased 2% in August. While higher prices have slowed resale housing demand, inventory struggles continue to limit sales volume (and encourage more home construction). Unsold inventory stands at just a 2.6-month supply at the current sales pace. New home sales increased 1.5% in August (effectively unchanged), but are 24% lower than a year ago because of higher construction costs and some limiting of sales.

A year ago, 43% of new home sales were priced below $300,000. In August, the share fell to 30%. Inventory is balanced, at a 6.1-month supply. Builders will need to watch resale inventory in local markets to gauge how higher prices and rates are affecting available demand.

While higher home prices have priced out some buyers, particularly among first-time buyers, home owner equity/wealth has surged to $23.6 trillion. Increased levels of home equity have supported ongoing strength in the remodeling market.

Yet those higher prices, combined with clear signals from the Federal Reserve, point to declining housing affordability ahead. The Federal Reserve is expected to announce tapering mortgage bond purchases at the November Fed meeting. As the Fed reduces these purchases, upward pressure will be placed on interest rates.

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