Longer-term, the consulting firm sees sharp home-price appreciation and rising interest rates as potential dampeners.
By Robert Isler
Ali Wolf, Chief Economist at Zonda, which specializes in gathering housing and real estate data, was upbeat about the housing market — certainly, at least, for the near term. She began Zonda’s late April update by noting that not only were the 916,000 jobs added in March quite robust, but even more encouraging was where they were being added. The charge was led by Leisure & Hospitality, the very group that was hardest hit during the initial months of the pandemic. This meant that the bottom of the “K curve,” representing those most affected economically throughout the past 12+ months, was showing signs of revitalization.
Closer to home, Construction was #3 on the list, with 110,000 jobs added, 37,000 of which were in Residential Construction. This was a testament to the sector’s strength, given that Residential had already fully recovered its 2020 job losses and is now at higher levels than before the pandemic started.
According to Indeed, current job postings are up over 22% since before the pandemic began. By market, only San Jose, San Francisco and Washington DC have comparatively lower listings. Wolf explained the disconnect of how so many could be out of work while employers seem desperate to hire. A chart that categorized industries revealed that Construction was one of those fields where demand outstripped supply. Qualifications and choice were key reasons they weren’t being filled. Some felt they didn’t have the appropriate skills required, while others believed they were overqualified or overeducated.
An Employment Conundrum
Looking forward, Wolf foresees a continuation of solid economic growth for, as she put it, “the next handful of months.” At the time of the presentations, she expected over a million jobs to be added in both April and May. (This was before the April jobs report came out on May 7 and surprised her and nearly every other economist, as only 266,000 new jobs were created in April.)
She posed the question, “How can 8.5 million people be out of work and yet we still have a roaring economy?” Her explanation was based on a JP Morgan Chase report first shared last year that examined bank account data. Those who were unemployed short term, under six months, were shielded due to the unemployment benefits they were receiving and were able to brush things off and continue to spend. However, those who have been out of work long-term, defined as 27 weeks or more, will not be returning to their traditional spending patterns anytime soon. The percentage who are long-term unemployed has been steadily creeping up and now stands at 43%. Additionally, 3.4 job losses are permanent, and 200,000 more businesses closed last year than during a typical year.
Housing Demand Roars Ahead
Turning to housing, Wolf shared that in the 12 months from March 2020 to March 2021, new home sales were up by 50%, with the April comparison promising to be even more dramatic. She noted that the picture for commercial real estate is far different, as a 10-city survey put the office building occupancy rate at just 26%.
Wolf compared 2021 to 2019, which was a strong year for residential housing. The Pending Sales Index (PSI) for March 2021 was 48% higher than in March 2019. Part of what she’s been hearing is that the quality of buyers is great, with average FICO scores for both new and repeat home buyers well above 700. Consumer confidence continues to climb as well, and is currently at its highest level since February 2020. Numerically, it translates into 6.2 million families planning to buy a home on the resale market over the next six months, and an additional 1.2 million looking to purchase a new home.
Insight Into Geographic Migration
Wolf then addressed a topic that’s been popular for the past year — net migration — which essentially refers to those in the largest, most crowded metros moving to smaller markets, usually inland. Although most tie the trend exclusively to a desire to avoid crowds after the COVID-19 experience, Wolf displayed charts focusing on the cost equation. She referenced Austin, Phoenix, Las Vegas and Raleigh among the top 10 markets for inbound migration. She cited Las Vegas as an influx example, adding that it shouldn’t be, given that it has a service economy hard hit by the pandemic. However, a comparison of housing costs with key exit markets, such as Los Angeles and San Francisco, told the true story. Nearly three-quarters of those living in San Francisco could easily afford the median-priced home in Las Vegas.
Another chart revealed that a $1.2 million home in San Francisco would cost just $450,000 in Austin for the equivalent space. Wolf shared that she had heard of a number of instances where buyers were offering several hundred thousand dollars above the asking price when moving from one of the high-priced coastal markets. Those market cost differentials explained the phenomenon. For locals residing in the in-migration markets who don’t yet own a home, however, this was not a welcome trend.
Warning Signals
Throughout the presentation, Wolf spoke of a few red flags in the housing market. For one thing, mortgage interest rates are rising — she said her team is forecasting interest rates to close at 3.5% this year and 4% next. She also expected homes to appreciate by more than 10% this year and 5% in 2022, calling those forecasts conservative. She noted that combined, the average monthly payout for housing from 2020 to 2022 will increase by 26%. Obviously, this will exclude some potential buyers.
“Eventually something will give,” she warned, since “in a rising rate and price environment, at a certain point, people will be priced out.”
She also noted that we are living in a heavy stimulus environment and will eventually have to pay the piper. She shared that during the Great Recession of 2008 a total of $1.8 trillion was funneled into the economy over several years to create stability. This time around, if the latest $1.9 trillion stimulus bill passes, the government will have pumped $5.7 trillion into the economy within one year — an amount that Wolf considers excessive. Along with inflationary pressures, she’s concerned about potentially higher taxes.
Challenges in a Mixed-Signal Environment
Tim Sullivan, Senior Managing Principal at Zonda, brought the meeting to the finish line. He shared a “Heard on the Street” list, a monthly survey Zonda conducts with builders ranking their largest concerns. The one he emphasized was that builders themselves noted they “are paying ‘stupid’ land prices.” He said it’s unsustainable.
Rising home prices moved up on the list of concerns from previous months, with building material costs, availability and home affordability the top three. He warned that 10% of builders saw an increase of cancellations month-over-month. While that’s not a high percentage, it is trending upward from the 6% in January. And, although there was a healthy 22% increase in contracts, that was down from a 40% increase two months earlier. As material costs continue to escalate, builders are being forced to raise prices. In the most recent survey, 36% of them said they were raising their base price by at least $10,000 compared to 26% the prior month.
The landscape for current home inventory for sale continues to be a major challenge. Since 2017, the decline in active listings by market has ranged from 20% to 72%, a decline that isn’t being compensated by an increase in construction of new homes.
