Housing Bubble Debate

Housing Bubble Debate

Housing Bubble About to PopMortgage Updates to 7/26/2021

Sales of existing homes climbed in June. This is thanks, in part, to inventory improvement. However, construction data was mixed. Nevertheless, the demand for homes boosts builder confidence despite labor and material concerns. This blog covers that as well as the housing bubble debate.

Existing Home Sales

Existing Home Sales increased 1.4% from May to June. While inventory continues to challenge buyers, 1.25 million homes hit the market. This is up 3.3% from May. What’s more, it follows a 7% increase over our previous report. The median home price increased 23.4% year-over-year. This reflects a record high $363,300. However, this is not the same as appreciation.


Housing Starts & Bubble Begins

Housing StartsMixed news came in regarding new home construction. Housing Starts, which measure the start of home construction, increased by 6.3% in June overall. Also, more importantly, so did single-family homes. However, Building Permits declined in June. Homes authorized (but not started) increased by nearly 60% year-over-year. This figure continues to climb but still reflects delays caused by higher costs and labor issues.

Consumer Confidence in a Housing Bubble 

Consumer Confidence in Housing MarketThese supply, cost and labor issues indicated decreased builder confidence. In fact, the National Association of Home Builders Housing Market Index, which reads builder confidence, fell one point (to 80) in July. However, readings over 50 indicate that more builders see positive conditions. Thus, July’s reading still reflects a strong level of confidence. This figure reflects high demand for homes across the country.

Jobless ClaimsJobless Claims Chart 7-21-21

Initial Jobless Claims increased over the latest week. This, as the number of people filing for unemployment benefits rose by 51,000 to 419,000. However, the number of claimants collecting regular benefits decreased to a post-pandemic low. Meanwhile, the number of people receiving pandemic-related benefits fell by 1.1 million. These declines reflect the impact of states which ended extended benefits.

Also of note, last week’s 20-year Bond Auction met average demand. In fact, the bid to cover of 2.33 dipped below the 12-month average of 2.35. Direct and indirect bidders took 79.1% of the auction, compared to 76.6% in the previous 12.

Lastly, have you heard the media mention a housing bubble? Don’t miss our important analysis about this topic, below.

Median Price of Existing Home SalesHousing Sales Bubble

Existing Home Sales, which measure closings on existing homes, rose 1.4% from May to June. On an annual basis, these rose 23%, compared to June of 2020. This makes sense given the pandemic-related shutdowns last year.

Housing inventory remains a huge challenge for buyers. Nevertheless, the situation did improve. For example, 1.25 million homes were listed for sale. This is up 3.3% from May. Also, it follows a 7% increase in the previous report. While inventory dipped 19% year-over-year, the outlook continues to improve.

  • Median home price hit a record high $363,300.
  • This is up 23.4% year-over-year.
  • Although the media sometimes reports otherwise, understand that the median home price isnot the same as appreciation.
  • Median price simply means half the homes sold were above that price and half were below it.
  • Also, the rise is owed to the number of higher-end homes for sale.
  • Sales of homes beneath $250,000 decreased by 15%.
  • Meanwhile, sales of homes over $1 million were up 150%.
  • Real appreciation remains at 14%.
  • Although this is still a high number, it is significantly less than the 23.4% rise in the median home prices

Affordability IndexAffordability Index

First-time homebuyers account for at least 31% of sales over the last 5 months. Although affordability remains tougher with higher home prices, rates still attract first-time home buyers. Meanwhile, cash buyers remained stable at 23%. However, this number increased by 16% over last year. Investors purchased 14% of homes, down from 17% from May.

Deconstructing Housing Starts Data

Housing Starts, which measure the start of construction on homes, increased by 6.3% in June and 29% year-over-year. However, a negative revision to May’s figures put the gain in June at 4.5%. Starts for single-family homes, which remain in such demand from buyers, increased by 6.3%. While the increase in Housing Starts signals good things, the decrease in Building Permits remains a concern. Permits decreased 5.1% from May to June. However, they are 23% higher year-over-year. Permits for single-family homes also fell, dropping by 6.3%.

  • Homes authorized but not started increased 60% year-over-year.
  • This figure continues to climb, demonstrating delays due to higher costs and labor issues.
  • The number of single-family units completed decreased by 6% from May to June and 3% year-over-year.
  • This is owed to the fact that builders struggle to secure appliances, another factor delaying completion.

Builder ConfidenceBuilder Confidence

Builder confidence moved lower in July. For example, the National Association of Home Builders Housing Market Index fell one point to 80. While this index declines, a reading above 50 signals expansion and 80 remains strong. The month of July is typically slower due to seasonality. Also, a heatwave may have deterred some traffic.

The Housing Bubble Debate

Given the hot housing market, you may have heard pundits talk about a housing bubble. Let’s break this down and analyze the underlying causes of a housing bubble.

  • In typical bubble-like conditions, demand declines and supply increases.
  • For instance, in 2007, roughly 3.7 million homes were listed for sale. Demand failed to meet the supply.
  • In contrast, today, inventory remains tight, with only 1.2 million homes for sale.
  • Additionally, demand is extremely strong.
  • When we examine current supply and demand compared to 2007, we see striking differences.
  • The demand is so high, a backlog exists.
  • In fact, the country’s largest homebuilder, D.R. Horton, is suspending construction to allow housing’s strained supply chain an opportunity to meet demand.
  • In other words, there is so much demand that the builder has to purposely slow down building, to reduce their use of materials, labor and appliances.

Housing DebateWhile the pace of appreciation remains hot, there is a big difference between slower home price growth and declines in prices. Plus, even though buying a home presents challenges right now, renting comes with challenges of its own. For instance, consider rising rental property prices across the country. That’s why it’s so important to understand the current market dynamics when it comes to talk of a housing bubble.

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