By Steve Goldstein
It seems appropriate on a day when the Federal Reserve is making an interest-rate decision to look at the most rate-sensitive sector, housing.
The Case-Shiller house price report released on Tuesday , showing an 11.9% surge for the 20-city composite in the three months ending February, was jaw dropping. Bespoke Investment Group calculates the annualized rise over the last eight months for the national index was 15.3% — a stronger period than even the subprime boom, or in fact any period in the series that dates back to the mid-1980s.
“This level of price appreciation isn’t sustainable long-term, but the combination of demographics, interest rates, and short-term demand shifts brought on by COVID have led to an absolutely terrifying rip higher in prices that even surpasses the subprime bubble’s peak,” said George Pearkes, a Bespoke analyst. Even in Cleveland, which missed out on the 2005 boom, prices climbed 12.5%. The housing website Zillow /zigman2/quotes/204413973/composite Z +1.57% forecasts the March data for the 20-city composite will be even stronger, with prices up 12.7%.
The hottest commodity around is lumber /zigman2/quotes/210109673/delayed LB00 -5.61% , with prices on the lead random length contract up 62% this year and 347% over the last 52 weeks.
Logically, the price rises are affecting sales. Bank of America /zigman2/quotes/200894270/composite BAC +0.41% , JPMorgan Chase /zigman2/quotes/205971034/composite JPM -0.07% and Wells Fargo /zigman2/quotes/203790192/composite WFC +1.31% each reported declining mortgage activity in the first quarter, and the rate of existing home sales in March was down 11% from its October peak. The latest data from the Mortgage Bankers Association, released Wednesday, saw a 4% drop in purchase applications in the week ending April 23, the fourth decline in the last five weeks.
Low inventory seems to be the key — there is not adequate supply to satiate the interest by urban dwellers to move to spacier surroundings.
For the publicly traded home builders, who have been reticent since the 2008-09 financial crisis to put up more homes, it appears to still be a good backdrop. The SPDR S&P home builders ETF /zigman2/quotes/202739297/composite XHB +0.82% has climbed 32% this year and has more than doubled, up 122%, over the last 52 weeks.
The Fed certainly has shown no signs of wanting to get in the way, focusing instead on a jobs market that is still some 8 million positions short of pre-COVID levels. The central bank is months away from even flagging a reduction in bond purchases, and likely years away from an interest-rate hike.
Ironically, if there is one thing that could disrupt the trend it could be the reopening of the economy. “With remote work giving way to at least partial back-to-office this summer, the housing market is in flux, but we expect overall demand to remain strong, consistent with well-above-trend GDP [gross domestic product] growth for the remainder of this year,” said Robert Dye, chief economist at Comerica Bank.
That view was echoed by Lewis Alexander, U.S. chief economist at Nomura. “It will be interesting to see how housing demand evolves in coming months as more people are vaccinated. Vaccine rollout and economic reopening could prompt more people to move back into metropolitan areas and rent apartments. Alternatively, housing markets might be experiencing more secular changes, leading to a permanent shift in demand towards single-family homes in suburban areas,” he says.
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