It has been a week of staggering home prices increase news which has seen the median existing home price surge to a record $350,000
while today we learned that the median new home price surged 18%, also to a record $374,400 (the average selling price was also a record $430,600)
Remarkably summing up what’s going on in the housing market, veteran housing analyst Ivy Zelman said she was seeing “hyperinflation” in the US housing “ecosystem” fraught with labor and materials bottlenecks.
Zelman’s warning comes as investors are closely watching whether a broad surge in inflation as the economy recovers from pandemic lockdowns will prove to be transitory. At least it validates one part of a recent Bank of America warning which said that the US is facing “hyperinflation” if transitory. Well we now have the hyperinflation part; for the sake of the dollar and cilivization, one can only hope that BofA is also right about the transitory part.
Speaking in a Wednesday webcast with Walker & Dunlop Chief Executive Officer Willy Walker, CEO of real estate research firm Zelman & Associates cited a truck-driver shortage along with shipping constraints and soaring costs as among the biggest problems homebuilders are facing. She underscored difficulty in moving shingles from Canada to the U.S. in particular, along with kinks in the supply chain for other staple building materials including drywall and insulation.
And, confirming the sudden drop in new transactions, Zelman also warned that home buyers are stretched.
“At some point the consumer cries uncle,” she said, quoted by Bloomberg.
She also warned that surging prices today could lead to tumbling prices tomorrow, cautioning about the impact of higher interest rates on home prices and the prospects the Fed may start to taper asset purchases. While more supply is set to come on the market eventually, Zelman sees homebuilder stocks as expensive, and she envisions a tough second half. Her cautious stance would accelerate if rates were to rise.
Perhaps in response to her warning, or today’s huge miss in new home sales, homebuilder stocks fell with the S&P homebuilding index closing down 1.2% on Wednesday after paring a drop of as much as 2.5%. Lennar Corp., M/I Homes Inc., PulteGroup Inc. and D.R. Horton Inc. were among worst performers. The index has dropped more than 13% from its all-time high in May.
Zelman’s “hyperinflation” warning echoes a recent analysis from Bank of America in which the bank’s chief economist Michelle Meyer said that the US economy “is facing an imbalance: a burst in demand has been met with constrained supply. Economics 101 tells us that when the demand curve shifts more than the supply curve, prices will rise, which continues until the balance is restored from a combination of slowing demand and greater supply.”
This narrative, Meyer said, describes the US housing market. Demand for housing climbed higher in the months following the onset of the pandemic, leaving existing home sales to reach a peak of 6.7 million saar in October, the highest since 2006. This has left builders to scramble to respond, sending building permits to a high of 1.9 million saar in January. The result: home prices and building costs have surged higher.
And while prices are soaring, the long journey to restore the equilibrium has at least started as existing home sales have come off the highs and housing starts have increased. For what it’s worth, Bank of America thinks existing home sales will continue to moderate while starts run at a high 1.6 million pace through this year and next until supply has returned to the historical average between 5-6 months, eventually allowing home price appreciation to cool. But, as Meye warns, “this will not be resolved overnight – it will be a long journey to balance the housing market.”
So yes, hyperinflation now… and utopia at some indefinite point in the future.
For those curious, BofA has summarized the recent housing trends in charts covering four key themes:
Signs from the recent data: Mortgage purchase applications and existing homes sales have been declining this year and are expected to slip further. In contrast, we see upside for new home sales and housing starts but with speed bumps due to high costs.
Surveys show discouraged buyers: As shown above, buyer sentiment has fallen to the lowest since 1982, reportedly due to high prices. But yet paradoxically homebuilder sentiment is holding close to record highs given exceptionally low inventory. This can only end in tears.
Builders are facing incredible cost pressure: All else equal, the rise in the price in lumber and related products has added over $34K to the price of a new home over the past year. The sharp gains in builder costs are starting to hold back production.
Double-digit home price gains are not sustainable: Home prices have soared over the year. The trajectory is unsustainable and price appreciation should cool next year but only slowly given the extreme imbalance between supply and demand.