The red hot housing market is slowing down the economy

·Head of News

Thu, Jun 24, 2021, 2:11 AM3 min read

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Thursday, June 24, 2021

Supply can't meet demand, housing edition

We've periodically checked in on the housing market at The Morning Brief over the last year, and the story has, in general, been consistent.

Home prices are rising amid a surge in demand, while low interest rates enable buyers to afford more house.

But cracks in the housing market have been starting to show, and now are likely to dent U.S gross domestic product (GDP) in the current quarter.

The hot housing market, in other words, has actually become a drag on growth.

Housing economist Bill McBride noted Wednesday that the economics group at Goldman Sachs cut its forecast for current quarter GDP, to an annualized growth rate of 8.75%, from a previous outlook for growth to hit 9%. A small change, to be sure. But an example of how the economy-wide demand glut does have some natural speed brakes.

On Wednesday, May's report on new home sales showed the pace of sales fell 5.9% last month to an annualized rate of 769,000. The actual number of homes sold last month was the lowest in a year. This report followed Tuesday's gauge on existing home sales, which declined for the fourth straight month to an annualized rate of 5.8 million homes.

These drops in the pace of sales, however, were accompanied by a continued surge in pricing as demand cannot be met. The median increase in the price of an existing home sold rose 23.6% over last year in May, while the median increase in a new home's price was 18.1% over last year. But this increase in prices can't offset the negative growth impact of fewer homes trading hands.

Mahir Rasheed, U.S. economist at Oxford Economics, flagged in a note Wednesday that while home sales are likely to be flat or lower for the rest of the year, backlogs should keep homebuilder activity supported.

"Nearly 90% of the for-sale inventory in May was of homes where construction is ongoing or has not started, while 36% of homes already sold have not yet broken ground," Rasheed wrote.

"These backlogs should support homebuilder activity even if the current pace of home sales moderates, although there are likely to be delays in the near term as builders contend with supply chain issues," he added. Rasheed also noted that with lumber prices coming down, builder cost pressures being pushed to buyers could ease.

But in a note to clients published Wednesday, Ian Shepherdson at Pantheon Macroeconomics was less sanguine on the situation.

New home sales "look set to fall further, with a decent chance they’ll soon be back below the pre-COVID trend," Shepherdson wrote. "The story here, we think, is simply that demand in the suburbs has fallen as COVID fear has faded. Inventory remains low but it is rising rapidly; supply hit 5.1 months of current sales in May, up from 3.6 months in January."

Shepherdson added that this data points to "an accident waiting to happen."

We argued earlier this month that lumber prices cratering reveal to us the future of this recovery. A future in which the most acute pricing pressures ease just as they fell: abruptly.

But abrupt turns in the economy don't create healthy conditions. Rather, these turns set the table for investors who couldn't be bullish enough coming into 2021 to suddenly find themselves caught offside the other way.

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland