In the world of economic adjectives, “hot” has had a very lonely year. In frustration, we’ve also ditched standard leading indicators, focusing almost solely on COVID-19 data. Well, those have improved lately: average new infection data is plummeting, and as this continues, it might just be time to give those time-tested, forward-looking indicators another going-over. One that’s turning heads again is the United States housing market. That’s saying something, because it hasn’t really done much since 2008. What’s going on?
First, a little context. In the early years of the New Millennium, few sectors of the economy were hotter than U.S. housing. Demand was fueled by very easy credit conditions, which were instrumental in creating a multi-year, super-bubble in real estate markets all over the country. The ensuing crash in 2008 chopped housing starts back by 75%, traumatizing builders and buyers alike. That chasm persisted for two-and-a-half years and had only partially recovered before the onset of the coronavirus—not making it back to what is commonly considered the basic demographic requirement of the economy. That is, until just before COVID-19 hit, in December 2019 and January 2020.
After such a sorry record, we might imagine the onset of the pandemic as the housing sector’s worst nightmare. After all, the sharp, instant drop in global economic activity was enough to scare anyone away from a major purchase of any kind. COVID-19 uncertainty typically shifts the focus to the immediate; large, lumpy, long-term purchases usually go to the back of the bus—and they stay there until the bad bumps are behind us.
Well, guess again. Against all expectations, U.S. housing is on a tear. December starts surged to 1.7 million units; the highest level recorded since December 2006. While this is well above the basic 1.4 million annual demographic requirement for the economy, the U.S. market can sustain this kind of overage for a long time, given the persistent, chronic under-building in the post-global financial crisis era.
Is it sustainable? For the moment, it seems to be. Building permit filings suggest that this is going to continue, at least for the short term. These recovered sharply from the pandemic-plunge and resumed the strong pre-COVID-19 trend. Last year ended off at a level not seen since early 2007. Moreover, the trend is being driven almost exclusively by growth in single-family units; multiple-unit permits take longer to react and are more contained at the moment. Finally, permits are running steadily ahead of starts, indicating pent-up pressure.
New home sales are also strong, although they are back to a more sustainable pace following a torrid rise immediately following the first lockdown. Months’ supply at current sales is still extremely low, suggesting that low inventory is crimping buying activity.
Existing home sales are taking up the slack. They rocketed up to an annualized 6.9 million units in October and have maintained levels above 6.7 million units since. Putting this in perspective, there really has been nothing like these levels since early 2006.
Median sales prices of existing homes reflect the heat in sales. Year-to-year growth launched into double-digits in August and remain there through December. If anything, this is an indication of what is likely to spill into the new home market when inventories pick up again.
So, it’s happening, and at long last. But why, and why now? Analysts are scrambling for an explanation. One of the more likely factors is lower interest rates; however, in past times of uncertainty, rates have been low with no uptake on the housing side. Surging growth must mean there is a fundamental source of demand. Long-standing, pent-up pressure is a strong possibility. Perhaps the 2008 trauma took too long to wear off, and underlying demand was well ahead of activity for many years. It could also be that confinement showed us all the imperfections of our current dwellings, leading to renovations or moving up—or even the purchase of second dwellings, to “get away from it all.” Sadly, lockdowns could also be affecting family cohesion to the point that the household units—and the need for corresponding housing units—are multiplying.
The bottom line?
As U.S. COVID-19 numbers improve, a key leading indicator is waking up. What makes this even more exciting is that it has been asleep for more than a decade. It’s too early yet, but we could end up concluding that one of the few good things to come out of the pandemic was the awakening of this sleeping giant. If so, it will undoubtedly rouse other large parts of the U.S. economy that have also been dormant for a long spell.
