Pollack: All eyes on housing

The Monday Morning Quarterback
A quick analysis of important economic data released over the last week

By Elliot D. Pollack

Nationally, we continue to play the waiting game on the economic recovery. Modest improvements have been reported in the employment market, but we are nowhere near back to normal. Continued vaccination rollout and another large fiscal stimulus are keeping everyone optimistic for now. In other areas of the economy, both the manufacturing sector and services sector continued to expand, and construction spending increased to the highest level ever recorded in December.

Locally, all eyes are on the housing market. Month after month, numbers being reported in the resale market are reminiscent of the housing bubble in 2005. There is a record low number of listings. According to The Cromford Report, as of February 1st, only 5,180 homes were for sale, a 56.7% decline from last February and a 14.5% decline from just last month. This equates to a 15-day supply of homes. In a normal market, you would expect about a two-and-a-half-month supply. The squeeze becomes much worse when you remove the luxury segment of the market. There is only a 10.4-day supply for homes under $500,000 and only an 8.5-day supply for homes under $350,000.

This means that it is very difficult to find a home to buy and that prices are increasing rapidly. Indeed, the median resale home price at the end of January was 20% higher than just one year ago ($342,000 vs. $285,000). And rapid price appreciation will continue in 2021 until more supply is made available.

This should all bode well for the new home market, which has seen a much more sustainable rate of price appreciation. According to Information Market, over the last 12 months, median new home prices have increased 4.5%. This has caused the gap in pricing between new homes and resale homes to shrink dramatically and will help the sales volume increase among new home subdivisions. In January 2020, there was a 22% premium comparing new home prices to resale home prices. Now, there is only an 11% premium.

As a result of both lack of supply and the rapid price appreciation of existing homes, people have been drawn to the new home market. And homebuilders have been responding. According to RL Brown, new home permits increased over 21% in 2020 to nearly 29,000 permits. We expect permits to surpass the 30,000-permit mark this year, which will break a 13-year streak of less than 30,000 permits.

And that has been the difference between what is happening now and what occurred between 2005 and 2007. We are severely undersupplied in both existing homes and new homes. We are not building excess inventory and we have completely absorbed all of the excess that was previously built. This is not a bubble that will come crashing down. But, though we are currently still one of the most affordable major markets out there, a rapid decline in affordability could cause its own issues. Overall, however, the new home market should continue to do extraordinarily well for the foreseeable future.

U.S. Snapshot:

  • The U.S. economy added 49,000 jobs in January. The employment gains were minimal and were primarily in temporary help roles. Trade, Transportation & Utilities and Leisure & Hospitality suffered the biggest losses in January. While Professional & Business Services and Government gained the most jobs for the month. Even small gains are welcome after the decline of 227,000 in December.
  • The U.S. unemployment rate declined to 6.3% but remains well above the 3.5% from a year ago.
  • ISM’s Manufacturing PMI index decreased by 1.8% to 58.7% in January 2021. January’s level was below analysts’ expectations of 60%. A reading above 50% indicates growth in the manufacturing economy.
  • The service sector increased to 58.7 in January reaching one of the highest levels in the last two years. The increase was welcomed news for the economy showing resiliency despite the increase in COVID-19 cases.
  • Productivity had the biggest quarterly decline since the second quarter of 1981. The fourth quarter had an annualized decline of 4.8%. For the year, productivity increased by 2.6% surpassing the growth in 2019 (1.7%) and 2018 (1.4%).
  • U.S. construction spending increased to record levels in December. Total construction estimated at a seasonally adjusted annual rate of $1,490.4 billion up from $1,475.6 billion in November. Private construction led the way with $1,137.6 billion up 1.2% from a month ago. Public constructions increased 0.5% to $352.8 million.

Arizona Snapshot:

  • Active listings in January dipped below 10,000 for the first time since 2005 according to the Cromford Report. February’s listings were 5,180 down 14.5% for the month and 56.7% for the year. The number of resales and median sales price increased 13.4% and 16.9% respectively.
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