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Economic & Housing Weekly Note

The Economy Continues to Improve, While Housing Takes a Breather in April

May 21, 2021

Key Takeaways:

  • The minutes from the Federal Open Market Committee’s (FOMC) April 27-28 meeting show meeting participants considered several factors that could be suppressing labor force participation, such as “early retirements, health concerns, childcare responsibilities, and expanded unemployment insurance benefits.” Meeting participants also noted the potential inflationary pressures from reopening as well as supply-chain bottlenecks. Participants “generally expected” those inflation measure to ease, though “a number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year.” The minutes also notably made mention that “a number of participants” agreed further improvement in overall economy activity would make it appropriate to begin discussing the possibility of adjusting the current pace of asset purchases at one of the upcoming meetings.
  • The Conference Board Leading Economic Index (LEI), a gauge of the economic outlook over the next three to six months, increased 1.6 percent in April to 113.3, boosted primarily by unemployment claims (inverted), stock prices, and the ISM New Orders Index. Given this gain, “the U.S. LEI has now recovered fully from its COVID-19 contraction—surpassing the index’s previous peak, reached at the very onset of the global pandemic in January 2020,” according to the press release.
  • Housing starts fell 9.5 percent in April to a seasonally adjusted annualized rate (SAAR) of 1.57 million, according to the Census Bureau. Single-family starts fell 13.4 percent to a SAAR of 1.09 million, while multifamily starts rose 0.8 percent to a SAAR of 482,000. Single-family permits declined 3.8 percent to a SAAR of 1.15 million, while multifamily permits jumped 8.9 percent to a SAAR of 611,000. Single-family permits have outpaced starts in three out of the four full months in 2021, including in April.
  • Existing home sales fell 2.7 percent in April to a SAAR of 5.85 million, the third consecutive month of decline, according to the National Association of REALTORS®. Single-family sales fell 3.2 percent, while sales of condos/co-ops rose 1.4 percent. The number of homes for sale fell 20.5 percent from last year’s levels, though this is nine percentage points higher than the prior month. The months’ supply increased three-tenths to 2.4 months, the highest level since October 2020. The median single-family sales price continued to increase, rising by a record 20.3 percent from a year ago. According to the press release, “[p]roperties typically remained on the market for 17 days in April, down from 18 days in March and from 27 days in April 2020.”
  • The National Association of Home Builders/Wells Fargo Housing Market Index was unchanged at 83 in May. The present single-family sales index was also unchanged. The index for single-family sales in the next six months and the index for the expected traffic of prospective buyers rose one point and fell one point, respectively.
Forecast Impact:

The economy continues to improve, with the April LEI surpassing the pre-pandemic peak, consistent with our outlook for strong growth in the second quarter. While risks such as inflation remain, the FOMC appears to largely be attributing the recent rise in inflation measures as “transitory,” and notably has acknowledged that further improvement towards the committee’s goals would make discussions concerning the pace of asset purchases appropriate.

In housing, the single-family-driven decline in April housing starts was unexpected, given continued housing demand and that single-family permits have outpaced starts in three out of the four months in 2021, including in April, suggesting a rebound on the horizon. However, it may also be a signal that labor shortages, a lack of buildable lots, and the escalating price of residential construction inputs are beginning to weigh on the ability of homebuilders to meet demand for new housing. Therefore, there is downside risk to our expectations for single-family starts going forward. Given that the May reading of the NAHB’s Housing Market Index remained unchanged from its elevated level, builders appear to remain optimistic about the housing market as demand remains strong, though the difficulties mentioned previously may explain the softness in construction starts. Existing home sales fell in April as expected, likely held back by a lack of available for-sale existing inventory. Improvements in vaccinations and the overall economy may help persuade homeowners who had previously been wary to list their homes during the uncertainty of COVID-19, particularly those who want to capitalize on the recent home price appreciation, which would provide a potential source of existing supply to help alleviate overall supply pressures.

Ricky Goyette
Economic and Strategic Research Group
May 21, 2021

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