Sales of new houses in August rose to 1.001 million at a seasonally adjusted and annualized pace, the Commerce Department said on Thursday – the first time the number has broken 1 million in 14 years.
The number shows that while other sectors of the economy are soft, housing is ready to play its traditional countercyclical role of leading the way out of a recession, said Robert Dietz, chief economist of the National Association of Home Builders.
It didn’t happen last time, when the proliferation of risky subprime mortgages that were packaged into bonds ended up tanking the economy, causing home prices to fall. But it did happen in every other recession since World War II.
“Housing is the bright spot in the economy right now,” Dietz said in an interview. “It’s a total flip of where we were during the Great Recession when the economic crisis was focused on housing.”
For the year, Dietz forecasts there will be 778,000 sales of new houses, which would be the highest level since 2006. For 2021, Dietz said he expects 795,000 sales.
The biggest boost to housing demand is coming from record-low mortgage rates, Dietz said.
“Low interest rates are the top driving factor – when you have a below-3% average on a 30-year fixed mortgage, that’s going to accelerate demand,” he said.
The average U.S. mortgage rate for a 30-year fixed loan is 2.9% this week, up from 2.87% last week, Freddie Mac said in a report on Thursday. It’s the ninth consecutive week the rate has been below 3%.
Dietz said another factor is a fallout of the pandemic: More people are working from home. Before COVID-19 started spreading in the U.S., about 4% of people worked from home, Dietz said. Now, it’s about 24%, he said.
“That 20 percentage point gain is a big deal,” Dietz said. “One of the things helping new construction in particular is the shift in demand to our suburbs and small metro areas. We have more people thinking about buying a house outside of high density areas.”
Whether that shift in demand will be sustained remains to be seen, he said.
“It does raise the question of how much of this will persist beyond a vaccine that might be available to the masses next year,” said Dietz. “But even if more people are going into the office, we might see that reduced to two or three times a week, instead of five, and that would mean they might be willing to tolerate a longer commute.”
Dietz projects there will be 887,000 single-family housing starts this year, which would be the highest since 2007’s 1.022 million. Next year, he expects the number will rise to 909,000.
Other forecasters have estimates that are even rosier than Dietz’s outlook. Fannie Mae economists say they expect single-family housing starts to rise to 933,000 this year and 1.097 million next year – which would be the first time the number broke 1 million in 14 years.
Unlike the Great Recession, as the 2008 economic contraction is known, the banking system was in a stronger position when the pandemic caused the economy to contract by a record 33% in the second quarter.
The Dodd-Frank Act passed in the wake of the financial crisis required regulators to enforce stricter capital and liquidity standards. And for the last decade, mortgage lenders have operated under a tougher set of rules.
Last week, the Federal Reserve said it would leave its overnight lending rate unchanged at its current near-zero level for at least a year. All 17 members of the Federal Open Market Committee said they expect to keep the central bank’s benchmark rate near zero at least through the end of 2021 and 13 estimated it would stay there through 2023.
That doesn’t impact long-term interest rates, such as financing costs for home loans. However, keeping the Fed benchmark rate near zero does make things easier for homebuilders who might be looking to banks for short-term loans based on prime rates, which are benchmarked to the Fed rate, Dietz said.
One headwind for the industry is lumber costs, Dietz said. The COVID-19 pandemic caused lumber prices to skyrocket more than 160% since April for two reasons, he said: Cooped-up Americans started more renovation projections, and lumber mills have yet to return to full strength after shut-downs.
The lumber industry lost 6,000 jobs as a result of the pandemic, and has gained back – on a net basis – only half of those, Dietz said.
“As people started nesting in response to the pandemic, they started undertaking all sorts of home renovation projects,” Dietz said. “At the same time, sawmills started shutting down and have only partially reopened because of social distancing concerns.”
That spike in the price of lumber hasn’t yet shown up in the sales data. The median price of a newly built home sold in August was $312,800, down 4% from a year ago, but that was because a shift in the sales mix, Dietz said, meaning smaller homes dominated sales.
