As states begin to ease stay-at-home orders, communities across the country are starting to see “For Sale” signs planted in neighbor’s lawns again. As we head into Memorial Day and fire up our BBQs, the conversations will inevitably turn towards the local real estate market, with topics ranging from:
- Will there be more buyers or sellers this summer?
- Will house prices decline given the COVID-19 pandemic, or go back to their pre-COVID levels?
- Will the average time to sell go up or down?
- Can you believe how much so-and-so is asking?
We love to discuss the local real estate market, and everyone has an opinion and prediction as to where the local market might be headed. But investors would be wise to understand the effect that nationwide housing data has on our economy, the markets and by extension our investments.
Let’s explore the latest housing data.
The U.S. Census Bureau and the U.S. Department of Housing and Urban Development compile new residential construction statistics every month, and separate the data by building permits, housing starts and housing completions. While each of those data sets is important to understanding the housing sector, housing starts is one of the most closely watched reports because it reflects a very direct commitment by a builder to build.
Think of it this way: As a general rule, home builders don’t start building a house unless they think they can sell shortly before or upon it’s completion. Once a local home builder is confident enough to start building, local employment goes up, and money is pumped back into the local economy as landscaping is purchased, furniture is bought, appliances are installed and people are put to work. Now, multiply that affect hundreds of thousands of times across the country and you can see the impact that housing has on our economy.
Here’s what was reported on May 19, 2020.
- Privately-owned housing starts in April were 30.2% below the March rate and 29.7% below the April 2019 rate.
- Single-family housing starts in April were 25.4% below the revised March rate.
There are other data sets that monitor the housing sector, and one of them is a index that asks home builders to rate housing conditions and the general economy. Compiled by the National Association of Home Builders, this index is a weighted average of many sub-indexes including the present sales of new homes, sales of new homes expected in the next six months and the traffic of expected buyers in new homes.
According to the latest from the NAHB, builder confidence for newly build single-family homes increased seven points to 37 in May, 50 is considered break even. This increase in builder confidence follows the largest single monthly decline in the history of the index, recorded last month. In addition, the index reflecting builder confidence about current sales conditions increased, as did builder’s confidence index measuring perspective traffic of home buyers.
While the home builders index data sets might be considered glimmers of hope, the housing industry in general brings a significant ripple effect throughout the rest of the economy.
- The housing starts were down significantly.
- Home builders are more optimistic this month vs last month.
- Construction materials have come down in price.
But, guess what prices are up this month? If you guessed lumber you’re right.
On the exact same day that the NAHB reported on home builder’s optimism, it was reported that lumber prices have increased by 13% since May 1 — the largest two-week increase in over 10 years.
Why have lumber prices increased? Well, there’s now a lot more work being done by the DIYers during the COVID-19 lockdowns. Plus, lumber mills have been operating at restricted capacity. More demand and less supply means higher prices.
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