While the potential influence of continued high inflation adds an element of caution to the current state of the economy, Zonda chief economist Ali Wolf said her take on the overall economy is more positive during the latest COVID-19 Update webinar.
“We had really good jobs report data [in October], and, as long as we don’t see another run-up in COVID-19 cases and as long as we don’t see businesses and consumers responding too much, our expectation is that the economy does continue to grow from here,” says Wolf.
The positive signs for the economy start with October’s jobs data, which reported the economy added 531,000 jobs month over month. Coupled with revisions for data from August and September, total nonfarm employment is down 4.2 million workers from March 2020, or 81% recovered. In particular, the leisure and hospitality sectors, which were stagnant in recent months, are “back on track,” according to Wolf. While not directly related to the housing industry, a more equal distribution of job recovery could influence an increase in short-term interest rates more quickly than initially predicted.
“If we see a more universal rebound, if we see the labor market come back pretty quickly now that the service sector is showing more signs of life, that can impact the Federal Reserve policy,” Wolf says. “That trickles down into real estate, interest rates, and the economy moving forward.”
While job growth is positive, labor shortages are still widespread nationwide and impairing companies' abilities to meet demand, Wolf says. In the housing industry specifically, while 40% of builders reported having strong labor shortages in January, Zonda survey data from October indicates close to 80% of builders are experiencing labor shortage issues.
Wage Growth and Inflation
Partially as a result of the labor crunch, employers are feeling pressure and increasing wages. Wolf says the country is experiencing a wage growth between 4% and 6% compared with 2020, the highest levels of year-over-year growth since 2004-2005.
The positive impact of higher wages and consumer spending power, however, is being offset by higher costs and high inflation numbers. Inflation has grown between 3.5% and 5% year over year and is at its highest levels since the 1990s. Continued high levels of inflation could cause the Fed to “pump the brakes” on interest rates, according to Wolf.
“Between now and January, try to look past the noise. A lot of the inflation numbers have been pretty scary. We could see choppy numbers on the labor front, and we could see choppy numbers on the stock market. It’s really easy to get hung up on that,” Wolf says.
Home Sales and Affordability
Home sales are tracking around 31% higher than in September 2019, and, in several major metro markets, including Indianapolis; Jacksonville, Florida; Riverside, California; and San Diego, sales have increased 50% to 80% since 2019. The sales increases come despite 80% of division presidents reporting to Zonda they are still intentionally capping sales.
“Eventually I think throttling sales will be a thing of the past. We started to see some throttling pullback when the market slowed in June and July, but as the market showed more life in October, we started to see any plans of throttling go on pause because we do still have the production capacity that’s struggling to keep up,” Wolf says.
Several factors, including strong demographics, rising wealth accumulation, low inventory, high migration, low interest rates, and strong financial safeguards, have served as fundamental price drivers in the housing market. The result is that in many of the top-performing metro markets, including Phoenix, Salt Lake City, and Los Angeles/Orange County, experienced double-digit price growth across entry-level, move-up, and luxury homes year over year.
Wolf says while some metros, such as Louisville, Kentucky, San Antonio, Jacksonville, and Indianapolis, have between 40% and 60% of new homes priced below $300,000, these numbers need to be compared on a relative basis to these market’s historical prices. As a result, even markets with high percentages of homes priced below $300,000 are experiencing their own affordability crunch on a relative basis. Tim Sullivan, Zonda senior managing principal, says affordability is expected to be the biggest influencer on the market in 2022, and it could lead to slower sales and a leveling of the market.
Real-Time Housing Data
While the word “normal” remains difficult to define, particularly in a COVID-19 environment, data from Zonda’s regular builder survey indicates some stabilization is occurring. While between 96% and 98% of builders reported raising prices month to month during the first half of 2021, 56% of builders raised prices month over month in October. Builders reported buyer hesitancy decreased from August to October, but buyers not getting qualified has increased significantly during the same time period.
Similarly, 14% of builders reported an increase in cancellations during October, well below nearly 28% in September. Zonda data also indicates 36% of builders are reporting higher online traffic.
“Looking a bit more closely into [the online traffic], I think that means the consumer is hovering,” says Sullivan. “We look at that as a potentially good news element because it means we still have potential buyers engaged, but they’re hovering.”
