Can Real Estate Supply Keep Up with Hot Demand?

Economic Report Monitor #59
August 14th, 2020

New residential figures for July came out and provided a fresh but of optimism for a strong economic recovery. Housing starts jumped 22.6% in July, another huge bounce, leading to a July total 23.4% higher than last year. The 1.496 million unit starts that beat expectations of 1.24 million heavily. 

It was multifamily home units that carried the number in July with a 56.7% increase in that category to 547,000 units. The number is the strongest since January 2020 (619,000 units) and is 67.8% higher than a year ago. Single-family homes were up just 8.2% to 940,000 units, slightly lagging the 1,034,000 units in February. Since single-family homes are typically more in demand, it's slightly concerning to see that category lag the overall trend.


Single-family home demand recovery is stronger than supply recovery

The NAHB/Wells Fargo Housing Market Index report pointed to hot demand for single-family homes coming out of the bottom of the COVID-19 economy. The index rose to 78 in August surpassing the near-term high in December 2019 at 76. Single-family sales current sales index jumped to 84 (meeting the near-term high in December 2019 at 84), and single-family sales expected sales index (just 1 below the near-term high in January 2020 at 80). 

The demand feels slightly ahead of supply right now despite the strong bounce in the real estate market since April. Housing units completed grew 3.6% in July with a similar trend of multi-family homes up strongly at 19.3% and single-family homes weaker at -1.8%. The hope is that these new waves of starts in June and July can push forward into robust completion numbers. This should be possible with low rates by the Fed encourage business expansion, but a prolonging COVID-19 pandemic could provide further disruptions.

With all that being said, it would not be a surprise to see home price growth start to accelerate in the latter half of 2020. Low mortgage rates have encouraged new homeownership, and the Fed is likely to keep long-term rates lower for longer. It's not an ideal situation in what appears to be a tight housing market, but the Fed feels its hands are forced to ease disruptions in other parts of the economy that have not recovered as strongly as real estate. 

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