For the 26th COVID-19 Update webinar since the start of the pandemic, Zonda chief economist Ali Wolf and senior managing principal Tim Sullivan examine the movement of the economy as employment stalls, COVID-19 cases fall, and home prices continue to rise.
The Economy and Inflation
Despite Wolf’s and other economists’ forecasts for 1 to 2 million new jobs in April, the latest jobs report from the U.S. Bureau of Labor statistics shows only 266,000 new nonfarm payroll employees added in April, down from 770,000 in March and 536,000 in February.
Of the 8 million Americans classified as unemployed under this report, 43% have been unemployed for 27 weeks or more, while 25% have been unemployed for less than five weeks. At the same time, job postings are continuing to climb, with a 23.4% rise in listings on Indeed since February 2020, before the COVID-19 pandemic.
Wolf attributes this mismatch to a number of factors, including child care needs, retirement, leaving the workforce, skills gaps, fear of the virus, and issues surrounding unemployment benefits. Twenty-three states have announced plans to opt out of federally funded unemployment programs in the near future.
In a silver lining for this report, the leisure and hospitality industry continue to show marked improvement, with 331,000 new jobs added in April. In addition, residential construction has added 46,400 new nonfarm payroll positions since before the pandemic in February 2020.
Based on the Consumer Price Index, core inflation has risen 3% year over year and 0.9% month to month. As of now, the Core CPI Output Gap—the difference between actual CPI output and expectations based on prices pre-COVID—has fallen to zero as actual 2021 performance has risen to meet 2021 expectations of prices. However, rapid price growth in the last few months alone has raised concerns about potential oncoming inflation.
The strongest inflation is happening in sectors just recently regaining strength, including lodging away from home, public transportation, and new and used vehicles. This has led some economists to conclude that this inflation is stemming from pent-up demand and does not pose a long-term threat.
Market Data
The shelter component of inflation is up 0.4% month over month and 2.1% YOY—below the national average. However, because of the ways in which the CPI is calculated, this captures only housing as consumption—i.e., rental properties, and does not include housing as an investment or for-sale homes. According to Wolf, this “feels off” from the realities of the new single-family housing market, where home prices are appreciating at a breakneck pace.
The Zonda New Home Pending Sales Index has risen 79% YOY, with current comps against the housing market crash in April 2020. Still, the housing market is operating on a “fundamentally different” level of sales activity than in 2019, Wolf says, with the New Home PSI now more than 40 points above the index’s pre-2020 highs. An otherwise bad comps period also provides an opportunity to observe the resilience of markets that struggled last year; in Las Vegas, for instance, the New Home PSI has risen almost 300% YOY.
Domestic migration remains a strong indicator of housing performance in this environment. According to Zonda’s newest data, Austin, Texas, experienced the strongest domestic net migration of the major markets from 2019 to 2020, followed by Phoenix, Jacksonville, Florida, and Raleigh, North Carolina. Oklahoma City and Tulsa are among the under-the-radar markets seeing strong growth.
Out of all new-home markets, The Villages in Florida experienced the strongest percentage shift in domestic net migration, regardless of total population. (Six out of the top 10 markets on this list are located in Florida.) Phoenix is the top market for total absolute net migration—by sheer numbers rather than percentages—followed by Dallas and Austin. On average, 250 people move into Phoenix each day.
In a major shift, 70% of the best-selling communities in this environment are located 30 or more miles from a major downtown—up from 30% last year. However, Wolf points out that this move away from the cities stemmed from “a really good reason to do so,” particularly from a money standpoint. “But we’ve seen the costs in some these outlying areas go up so much,” she says, “I just want to make sure we’re thinking about, if we want someone to sacrifice location for a better home, let’s just make sure that it is a better home, or that it is more affordable.”
This issue will only become more pertinent as downtowns and offices reopen and commutes resume. According to the Zonda Millennial Survey, a majority of millennials still live within 30 minutes of their job. In addition, 18% said that while they have worked from home throughout the pandemic, they plan to fully return to the office.
“Those close-in suburbs are still, I think, the most important bet and most important consideration for where people really want to live,” Wolf says. (Fourteen percent of respondents said they have no intention of returning to the office.)
A number of builders have reported that, “due to pricing pressures, a lot of entry-level communities are seeing sales to move-up buyers.” While this environment maintains new-home sales, it disrupts the demographic tailwinds of new-home buyers. One solution Wolf proposes may be to size down entry-level homes, in line with millennials’ lack of resistance to smaller single-family homes.
Zonda anticipates that mortgage rates will average 3.3% across 2021, trending closer to 3.5% by the end of the year. This average is expected to rise to 3.7% across 2022, ending close to 4%. Other predictions for 2021’s mortgage rates vary from source to source, from 3.4% (Freddie Mac and NAHB) to 3.7% (Mortgage Bankers Association). Rising rates are expected to have a large impact on the future of housing prices, as well as the ability for potential buyers to afford a home.
Housing starts totaled 1.4 million last year, and Zonda is anticipating 1.5 million this year, with strong start growth on this trajectory thus far. Some builders are seeing waiting lists one to two years long, with community sales ranging from four to 10 per month.
Real-Time Housing Stats
Respondents to Zonda’s builder surveys have reported that lot prices have hit all-time highs in some markets, though constraints on lots are expected to ease in the near future.
Most builders surveyed are taking some measures to cap or slow down sales to align with production capacity. Fifty-six percent said they are only taking a specific number of contract sales per project per month, while 21% reported that they are taking a pause on contract sales entirely until construction can catch up.
Twelve percent of builders reported an increase in cancellations month to month, and 96% of builders raised base prices in May compared with prices in April. Almost 40% of builders reported that these price increases total $10,000 or more.
After a long stretch of strong demand, buyers are also starting to show signs of “pushing back” against current new-home market conditions. Forty percent of builders surveyed reported hesitancy from buyers as a major challenge—up from 18% to 19% on a monthly basis over the past three months. Senior managing principal Tim Sullivan attributes this spike both to rising prices and media statements on an “overheated” housing market. Still, based on the results of the Zonda Millennial Survey, Sullivan concludes that many potential buyers are looking for a good reason to move in the near future, given a compelling offer.
One-third of builders reported ongoing issues with government services, up from 53% last month. Labor shortage reports spiked to 62%, up from 49% last month, while almost all builders reported supply disruptions at 96%, up from 86% last month. Forty-two percent cited land disruptions, up from 37% last month.
Together, Wolf and Sullivan have pinpointed three “yellow flags,” or early warning signs of difficulty in the market. First, the housing market is showing some indications of stabilizing, with some anecdotal reports of buyer traffic falling back. Second, as home prices continue to rise and demand remains strong, the “invisible ceiling” beyond which prices put pressure on demand is an entirely unknown point—one that may not be known until it is hit. And third, falling sales at the upper end may portend a pullback in total sales, driven by rising prices and interest rates across all product types.
The next COVID-19 Update webinar will take place on June 23 at 11 AM PST/2 PM EST. Click here to register.
