August 23, 2021

Existing home sales rose 2.0% in June to 5,990 thousand after climbing1.6% in June.   Much of the four consecutive declines from February through May were almost certainly caused by the  the lack of supply which is currently at a near record low level of 2.6 months.  Potential home buyers simply do not have many houses to choose from, and of the ones available some will be too expensive, too big, too small, not in the right location, etc.  But at the same times rapidly escalating prices are negatively impacting buys at the low end of the market.  Higher down payments combined with higher monthly payments are pricing some of the potential buyers for inexpensively priced housing out of the market.  Sales will rebound in the months ahead as builders step up the pace of production.

Lawrence Yun, NAR chief economist said that “We see inventory beginning to tick up, which will lessen the intensity of multiple offers.  Much of the home sales growth is still occurring in the upper-end markets, while the mid- to lower-tier areas aren’t seeing as much growth because there are still too few starter homes available.”  He added that, “In the meantime, some prospective buyers who are priced out are raising the demand for rental homes and thereby pushing up the rental rates.”

The series of fiscal stimulus checks has boosted the savings rate to 9.4% in June.  The consumer has ample funds to spend on housing or anything else if he or she chooses to do so.

Meanwhile, mortgage rates remain low at 3.0%.

As further evidence of the strong demand, the average home sits on the market for a record short 17 days.  That is the shortest period of time between listing and sale ever recorded.

The biggest flaw in this otherwise very rosy scenario is that there are very few homes available for sale.  With a small increase in the number of homes on the market and a modest increase in the pace of sales, housing inventory edged upwards to a 2.6 month supply in July which is near the record low level of inventory (1.9 months) and far short  of the 6.0 month supply that is required to balance the demand for and supply of homes.

Home prices fell 0.8% in July to $359,900 after having risen 3.5% in June toa record high level of $362,8000.  This means that the year-over-year increase is now 17.8%. It shows what can happen to prices when there is such a severe shortage of available homes available for sale.

Home prices are surging.  Housing affordability is dropping.  But there are two other parts of that equation — mortgage rates and income.  After hitting a record low level of 2.7% mortgage rates have risen slightly to about 3.0% which is still very low.  Meanwhile, income has been surging as a result of the tax refund checks being send to consumers as part of the COVID relief packages.  As a result  housing affordability has fallen from where it was earlier this year, but came in at 146.3 in June  This means that potential home buyers had 46.3% more income than required to purchase a median-priced home.  In the go-go days in 2007 just prior to the so-called “Great Recession” this index stood at  115.  Indeed, at 146.3 the affordability index is roughly in line with where it was in 2018 and 2019 — prior to the recession So despite rapidly rising prices, most consumers are easily able to afford a median priced home.

Having said that, some first time buyers are being shut out by the rapid price acceleration.  For example, the required down payment has risen from $54.600 in February of last year — just prior to the recession to $74,100. The monthly payment has risen from $984 to $1,255.  As a result, first time homebuyers accounted for 30% of sales in July which is down from 34% in July of last year.

A new study by the NAR found that vacation home has grown 57.2% in the past year compared to a 20% year-over-year increase in total existing home sales.  Yun added that, “The appeal of vacation homes has certainly grown during the pandemic, especially among employees permitted to work from home.  As businesses decide new guidelines for remote workers, even allowing permanent remote options in some cases, look for vacation homes to remain a popular option.”

Given all of the above we expect home sales to rise 0.8% in 2021 to 6,700 thousand.

.Expect GDP to rise 8.90% in the third quarter and 10.5% in the fourth quarter.  We expect GDP to grow by 8.1% for 2021 as a whole and 5.1% in 2022..

Stephen Slifer


Charleston, S.C.