New Construction Ends the Year Strong While Existing Sales Slide Amid Record Low Inventories

Key Takeaways:

• Existing home sales fell 4.6 percent to a seasonally adjusted annualized rate (SAAR) of 6.2 million in December, according to the National Association of REALTORS®. Still, existing sales were strong in 2021, rising 8.5 percent compared to 2020. The number of existing homes available on the market in December declined 14.2 percent year over year, with the total number of for-sale units reaching 910,000, the lowest level since the series began in 1999. The months’ supply fell three-tenths to 1.8, also a record low. The median sales price for an existing single-family home increased 16.1 percent from a year ago, the fastest annual growth rate since July 2021.
• Housing starts increased 1.4 percent to a SAAR of 1.7 million in December, bringing the annual total to 1.6 million in 2021, a 15.6 percent increase compared to 2020, according to the Census Bureau. Single-family starts decreased 2.3 percent to a SAAR of 1.2 million, though the November figure was revised upward. Multifamily starts jumped 10.6 percent to a SAAR of 530,000, though the November data was revised downward. Permits increased 9.1 percent over the month, the third straight monthly gain as multifamily permits jumped 21.9 percent and single-family permits were up 2.0 percent.
• The National Association of Home Builders/Wells Fargo Housing Market Index declined 1 point to 83 in January, marking its fourth straight month of a reading of at least 80. A reading above 50 indicates that more builders view the single-family market as “good” rather than “poor.” The index for single-family sales in the present was flat at 90, while the index for single-family sales in the next six months and the indicator for traffic of prospective buyers each fell 2 points to 83 and 69, respectively. The press release cited “growing inflation concerns and ongoing supply chain disruptions” as the primary causes for the small decline in the headline index.

Forecast Impact:

The strong housing starts figure, when considering revisions to previous months, was in line with our quarterly expectations. Additionally, there were 1.5 million total homes currently under construction, the highest level since 1973, which we believe continues to highlight the supply chain issues and labor shortages faced by builders. In fact, despite the NAHB survey remaining above its historical average, their press release stated that material shortages were adding weeks to single-family construction timelines. While we continue to expect 2022 to be a strong year for starts as builders eventually work through their backlogs and supply chain difficulties ease, the recent increases in mortgage rates present some downside risk to this forecast. On the existing sales front, we had expected some decline in December as recent months’ elevated sales numbers appeared to be unsustainable given the lack of inventory available for sale, though the actual decline was somewhat larger than anticipated. Given that the months’ supply hit another record low and affordability is increasingly a concern as home prices have surged and 30-year fixed mortgage rates have increased around 50 basis points since the beginning of 2022, we may modestly downgrade our near-term existing sales forecast.

Nathaniel Drake
Economic and Strategic Research Group
January 21, 2022

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