In this month’s COVID-19 Housing Outlook webinar, Zonda chief economist Ali Wolf offers one main theme for its 27th look at the state of the COVID-19 economy: shifts.
“We have some shifts that are happening in the market for the good,” Wolf says. “We have some shifts that are happening that are more neutral. A lot of these things … pose some risks, but they certainly do pose opportunities as well, especially looked at through the right lens.”
The Economy and a More Universal Rebound
The economy added just under 600,000 jobs in May, and the number of active workers in the market is now 7.6 million below the total worker count before the COVID-19 pandemic began. In the interim, many states have pulled back on expanded unemployment benefits; while Wolf does not believe the upcoming June jobs report will capture the impact of this change, she believes it will capture a reaction to the announcement.
Many of the sectors on the end of the “K-shaped” recovery are beginning to thrive. Leisure and hospitality remain the fastest-growing sector at this point, with nearly 300,000 new jobs in May.
The service sector has begun to return as well. Based on OpenTable data on seated diners, June activity is about on par with seated dining activity compared with June 2019. TSA passenger traffic also has skyrocketed this year, down just 9% in June compared with June 2019.
However, this spike in demand must contend with ongoing labor shortages. Accommodation and food services currently have the highest quits rate of the job sectors at 5.6%, followed by leisure and hospitality at 5.3% and retail trade at 4.3%.
“We should expect to see more upward pressure on wages, which for consumers generally means a higher cost of goods and services,” Wolf says.
To start, Wolf acknowledges that the new-home market “feels a little bit different” now than it did before. In the beginning of the year, Zonda had projected ongoing growth in the new-home market, with some risks and shifts emerging in the second half. Comps have gotten harder, interest rates have risen, and affordability has been stretched to a breaking point for some buyers. Some seasonality also has begun to return, following a year in which selling seasons were disrupted.
New-home sales still are up 34% YOY, although this rate has been falling steadily since the start of 2021. In terms of the Zonda New Home Pending Sales Index’s components, the average sales rate has fallen slightly but still remains elevated far above the number of new-home orders.
New-home sales growth is spread across the country, not just concentrated in one area. Over the past two years, Cincinnati has had the steepest shift in its PSI at 100%, followed by Florida's Tampa at 95% and Jacksonville at just over 90%.
The average sales rate per community currently outperforms the average sales rate from July and August 2020 in many of the most active markets, but in some, such as Austin and Charlotte, a reversal reflects that more builders are actively slowing sales. “In the coming months, I fear that a lot of the housing data is going to slow significantly or turn negative. And I just want all of us to be in the proper mindset … to be able to set aside what’s happening with the supply and with what’s happening with the demand.”
When asked how new-home demand was faring in June compared with expectations, 44% of builders surveyed by Zonda—the bulk of responses—reported that demand was “on track” with their expectations, while 29% said it was slower than expected but not worrisome. Twenty-four percent said buyers had paused their search because of prices, and 10% had paused because of lack of inventory.
A Look at Pricing
Prices are still “higher than yesterday and lower than tomorrow,” with home price appreciation rising continuously. The Case-Shiller Home Price Appreciation Index came in recently at 14.6%, the Census measure of new-home prices came in at 18.1%, and the National Association of Realtors' existing home price growth rate came in at 23.6%. In the most expensive markets—Los Angeles/Orange County and Seattle, in particular—resale home prices are rising at an average rate of over $350 per day.
While entry-level buyers are very active, Wolf says that entry-level means “something different” today. The prices of entry-level homes have appreciated rapidly year over year, with price gains ranging from $40,000 over the last 12 months in Houston to $95,000 over the last 12 months in Sacramento.
Some of the strongest home price appreciation is in markets with the highest inflow of tech workers leaving more expensive areas. (Wolf does not claim that the two are directly related, but believes there is a close relationship.)
Despite this frenzy, many markets are seeing a rising percentage of listings with price drops. This does not necessarily indicate that prices have “gone negative,” but instead that buyers are becoming “more selective” in their home choices—hitting a price that they are not willing to pay for a home they are not completely sure of.
Real-Time Housing Stats and Trends
Zonda senior managing principal Tim Sullivan agrees that demand is still strong—it just looks different now than it did six weeks ago. Builders are talking about the price ceiling more and more, and some potential buyers on interest lists are actually passing on opportunities when it’s their turn, often due to affordability. Some builders, instead of raising prices, are instead raising lot premiums—and there is some talk of the possibility of incentives returning to the market. “I can’t show you where they’re happening yet, cause they’re not, but they’re being talked about,” Sullivan says.
When asked about changes made to sales strategy to align with capacity, 56% of builders reported only taking on a specific number of contract sales per month—down from 70% in April—while only 9% reported “business as usual,” down from 46% in November. A rising number of builders are only taking contract sales at the point lots are ready, which will impact sales rates later on.
Nine percent of builders reported a rise in cancellations month over month. Ninety-one percent reported raising base prices in June compared with May, softening slightly over time. Only 4% reported higher traffic from May to June, while over 60% reported a drop—owing to a lack of supply, consumer pauses, or the return of distractions and seasonality.
A majority of builders reported that they have either already made plan or exceeded plan for 2021 by the year's halfway point. Sixty-seven percent reported issues with government services, 66% with labor shortages, 91% with supply disruptions—down from 96% last month—and 47% with land disruptions.
The average increase in base prices has fallen over the past six weeks as well, with the majority of builders reporting average price increases of approximately $5,000—down from $10,000 to $20,000 in the past. Appraisal values remain a strong issue for builders, but hesitancy has skyrocketed as a concern, up from 18% in April to 54% in June.
The next COVID-19 Housing Outlook webinar will take place Aug. 11 at 11 AM PST/2 PM EST. Click here to register.