January 22, 2021

Existing home sales rose 0.7% in December to 6,760 thousand after having declined by 2.2% in November.  The 6,860 thousand pace in October was the fastest pace of sales since 2006.  In the midst of a pandemic buyers are lining up to purchase homes as the pace of sales climbed to the fastest rate in 14 years.

Lawrence Yun, NAR chief economist said that “Home sales rose in December, and for 2020 as a whole, we saw sales perform at their highest levels since 2006, despite the pandemic,  What’s even better is that this momentum is likely to carry into the new year, with more buyers expected to enter the market.”  He added that, “Although mortgage rates are projected to increase, they will continue to hover near record lows at around 3%.  Moreover, expect economic conditions to improve with additional stimulus forthcoming and vaccine distribution already underway.”  Finally, Yun noted that, “To their credit, homebuilders and construction companies have increased efforts to build, with housing starts hitting an annual rate of near 1.7 million in December, with more focus on single-family homes.  However, it will take vigorous new home construction in 2021 and in 2022 to adequately furnish the market to properly meet the demand.”

The $3.0 trillion of fiscal stimulus in the spring of last year dramatically boosted real disposable income so potential home buyers have the money to spend.  Initially the economy essentially locked down and consumers had nowhere to spend the additional income so, the savings rate surged to 33.7% in April.  It has since declined somewhat but remains high at 12.9%.  The consumer still has ample funds to spend on housing or anything else if he or she chooses to do so.  And now there is a second $900 billion corona virus relief package on its way.  And Biden has proposed yet another $1.9 trillion fiscal stimulus package highlighted by $1,400 checks to taxpayers.

Meanwhile, mortgage rates are at a record low level of 2.7%.

The biggest flaw in this otherwise very rosy scenario is that there are very few homes available for sale.  With a big decline in the number of homes on the market and little change in the pace of sales, housing inventory slipped to a 1.9month supply in November which is record low level of inventory and  one-third  of the 6.0 month supply that is required to balance the demand for and supply of homes.

As the result of strong demand and little supply, the average home was on the market for just 21 days in December.  That is the shortest amount of time between listing and sale on record for a series that dates back to 2011.  Indeed, 70% of home sales sold in December were on the market for less than a month.

Home prices edged lower by 0.4% in December to $309,800 after having declined 0.7% in November  This means that the year-over-year increase is now 12.9%. It shows what can happen to prices when there is such a severe shortage of available homes available for sale.

With income surging, and interest rates falling, but home prices beginning to rise quickly, housing affordability has dropped from 180 in early summer to 166 in November.  This means that potential home buyers had 66% 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.  So while housing may be somewhat less affordable that it has been, it still remains extremely affordable.

Given all of the above we expect home sales to rise 9.0% in 2021 to 7,350 thousand.

Expect GDP to rise about 7.0% in Q4, followed by 5.5% in 2021.

Stephen Slifer

NumberNomics

Charleston, S.C.