US housing market bounces with a capital “V”

The housing market started the year in great shape thanks to record employment, rising wages and low mortgage rates, but the Covid-19 pandemic soon sent the sector crashing. As the gravity of the situation became apparent, the fear for health and jobs and the turbulence in financial markets saw even seasoned buyers take flight with transactions pulled in significant numbers.

Existing home sales fell 32% between February and May, taking them towards the lows experienced in the global financial crisis while new home sales proved to be only marginally more resilient, falling 25% between January and April. Housing starts – a measure of construction activity – fell 42% between January and April with the construction sector losing 1.1 million jobs through March and April as State Governors shut down building sites.

However, the news is already turning for the better with lead indicators pointing to a vigorous recovery in housing activity. The Federal Reserve’s aggressive liquidity injections, interest rate cuts and asset purchases have calmed market nerves and kept credit flowing to the extent that mortgage rates are now at historical lows. A resurgent equity market is also a positive through lifting sentiment, particularly for those first-time buyers who kept their deposit invested there.

The result has been that mortgage applications for a home purchase surged to an 11-year high, which is remarkable given 32 million people, or nearly 20% of the labour force, are claiming some form of unemployment benefit. Record low mortgage rates have improved affordability while significant pent-up demand following weeks of lockdowns are also leading to a major bounceback.

Another important factor explaining the vigour of the recovery is that the average age for a home buyer is 47, according to the National Association of Realtors. This demographic is less likely to have been impacted by unemployment, will be more financially secure and have a better credit history versus younger members of the population who are more likely to work on lower wages in retail and hospitality. Older home buyers are also more likely to be looking for an investment property or a vacation home.

The surge in mortgage applications already triggered a 44.3% jump in pending home sales in May while new home sales recorded a 19.4% bounce May and an 13.8% gain in June to leave the level at 776,000 – the highest since 2007! Both new home sales and pending home sales are recorded at the point buyers sign the contracts – right at the beginning of the transaction process. Existing home sales are recorded as transactions when contracts are closed, which can take a couple of months and explains why they continued to fall in May. However, they rose in June, with the strength in pending home sales suggesting we should be back up to the 5-5.5mn range next month (see right hand chart above).

The recovery on housing demand is also prompting a rapid revival in construction with the National Association of Home Builders sentiment having fully reversed its post-Covid losses. Construction employment has risen by 611,000 in the past two months, while housing starts have risen a cumulative 27% during the same period. Based on the recovery in sentiment further strong gains in jobs and construction are likely over the next couple of months, which will support 3Q GDP growth.

A strong housing market boosts demand elsewhere in the economy. Housing transactions are strongly correlated to retail sales – as people move to a new home they typically spend money on new furniture and home furnishings, garden equipment and building supplies such as a new paint job and a bit of home improvement. It also results in demand for moving services while generating legal and mortgage fees within the service sector, which should also all help boost 3Q GDP.