New and Existing Home Sales Rise Despite Low Inventories as Personal Income and Saving Rate Increase, Buoyed by Child Tax Credit

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, was revised up one-tenth to 6.6 percent annualized growth in Q2 2021, according to the second estimate from the Bureau of Economic Analysis (BEA). The upgrade is a result of upward revisions to both nonresidential fixed investment and net exports. These changes were partially offset by downward revisions to private inventory investment, residential fixed investment, and state and local government spending.
• Personal income, adjusted for inflation, increased 0.7 percent in July, the first increase since March, according to the BEA. Real disposable personal income also rose 0.7 percent. Excluding receipts of transfer payments, real personal income ticked up 0.2 percent. Real personal consumption expenditures (PCE) declined 0.1 percent as real goods spending fell 1.6 percent while real services spending ramped up 0.6 percent, the fifth straight monthly increase. The personal saving rate moved up 0.8 percentage points to 9.6 percent in July, though the May and June saving rates were revised downward 0.5 percentage points to 9.8 and 0.6 percentage points to 8.8, respectively. The saving rate in February 2020, before the pandemic, was 8.3 percent. The PCE increased 4.2 percent from a year prior, the fastest annual increase since 1991, while the core PCE deflator (core excludes food and energy prices) rose 3.6 percent annually, also the fastest pace since 1991.
• Durable goods orders decreased 0.1 percent in July, according to the Census Bureau. However, this was weighed down by a 38.1 percent decrease in orders for aircraft and parts. When excluding orders for transportation equipment, new orders improved by a more solid 0.7 percent. Durable goods shipments rose 2.2 percent. Core capital goods (nondefense excluding aircraft) orders were essentially unchanged, while shipments of core capital goods rose 1.0 percent. Inventories of core capital goods rose 0.5 percent.
• Existing home sales increased 2.0 percent to a seasonally adjusted annualized rate (SAAR) of 5.99 million in July, according to the National Association of REALTORS®. Single-family sales increased 2.7 percent to a SAAR of 5.28 million, while condos/co-op sales decreased 2.7 percent to a SAAR of 710,000. From a year ago, the number of existing homes on the market fell 12.0 percent, the 26th consecutive month of year-over-year declines. The months’ supply increased one-tenth to 2.6. The median sales price for an existing single-family home rose 18.6 percent from a year ago, though this was a deceleration of 5.6 percentage points from the prior month’s price growth.
• New single-family home sales increased 1.0 percent to a SAAR of 708,000 in July, 25.9 percent below the level seen a year ago, according to the Census Bureau. June sales were revised up by 25,000 to a SAAR of 701,000. The months’ supply rose two-tenths to 6.2, the highest level since April 2020. The number of new single-family homes for sale increased 5.5 percent to a SAAR of 367,000, the highest level since November 2008, though the share of homes for sale that have not been started remains around 30 percent, a record high. The median sales price for new houses sold increased 18.4 percent from a year ago.

Forecast Impact:

While headline GDP was revised upward slightly in the second estimate from the BEA, the downward revision to private inventory investment highlights how supply-chain disruptions have hampered businesses’ ability to restock depleted inventories. Still, we expect inventory investment to rise sharply through the remainder of 2021 and into 2022 as consumers shift their demand away from goods and into services, allowing businesses to restock, and supply-chain disruptions slowly resolve. Further, we expect business investment to remain generally strong, a view that was supported by the solid reading for durable goods orders when excluding transportation equipment, as well as the upgrade to the Q2 reading of business fixed investment. However, more volatile categories, such as automotive and aircraft – which have been hit by a semiconductor shortage and sluggish international travel, respectively – may drag total business investment down somewhat. The increase in personal income was due in part to new advance Child Tax Credit payments starting in July, which we expect will likely partially offset the decline in transfer payments from expiring unemployment benefits in September. Growth in real PCE fell for the month, supporting our expectation of a deceleration in consumer spending growth when compared to the strength seen in both Q1 and Q2. Further growth should be supported by an elevated saving rate, wage increases, and government support. The decline in real goods PCE and partially offsetting increase in real services PCE is in line with our expectations that future consumption growth will be driven by spending in the services sector.

Existing home sales exceeded our expectations in July, rising despite a continual lack of available supply. This will likely lead to an upward revision to our Q3 estimate of existing home sales, but we continue to expect that the lack of homes on the market will constrain the pace of existing home sales. Therefore, we continue to expect a slower annualized pace of existing home sales in Q3, though our expectation that inventories will begin to recover somewhat in the latter half of the year should help support sales in Q4. New home sales, when combined with the upward revision to June’s number, also surprised to the upside as more new homes were listed, though a record percentage of new homes for sale remain houses that have not yet been started, which highlights the ongoing difficulties that homebuilders are having in keeping up with demand. Therefore, we expect sales to move upward as the year continues, as sufficient demand is present, but the pace at which acceleration occurs will likely be determined by the speed at which homebuilders can clear their current backlogs and overcome material availability and other supply constraints.

Nathaniel Drake and Rebekah Gutierrez
Economic and Strategic Research Group
August 27, 2021

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.