Housing continues to be a bright spot in the economy, with housing starts jumping 17.3% in June and housing permits rising 2.1% — the second straight month of gains following the economic shutdowns of March and April.
The gains come as the 30-year mortgage rate has reached a record low.
While the June housing data, released by the Commerce Department on Friday, may have been short of market estimates, the growth in these difficult economic times is still good news.
The gains also come as the average 30-year mortgage rate dropped to a record low of 2.98% and the National Association of Home Builders (NAHB) Index is already back to pre-pandemic levels.
As the housing market bounces back…
Opportunity remains for home builders
The surge in starts, along with renewed optimism reflected in the NAHB Index, reflects that construction will continue during these uncertain economic times times – unlike the decline that took place in the recession of 2007-9..
Housing inventory remains depressed, although it is slowly ticking upward, with the months of supply on existing single-family home sales at 4.6 months as of May compared to an average of nine months during the Great Recession.
With six months being seen as the equilibrium in the market, there is still sufficient opportunity for home builders to fill the gap. Earnings trends in home builders like Toll Brothers, KB Home and D.R. Horton have indicated that those focused on entry-level housing and spec-construction models are benefiting most as buyers are looking for quick move-in options.
What does this mean for home buyers?
Home affordability has seen favorable trends on a number of fronts. First, the majority of people who have lost their jobs are younger and typically in the rental market. Income levels of potential buyers have remained relatively steady.
While the limited supply has caused home prices to remain stable or slightly increase, mortgage rates have continued to decline to their lowest on record at 2.98%. The 10-year Treasury rate, a common indicator on mortgage rates, remains below 1%.
Mortgage rates did not follow the same drop initially because of a backlog of mortgage applications and refinancings, but the spread between the two yields is starting to taper with even more room to fall.
Millennials are also no longer the youngest generation in the workforce. While they may have been older when getting married and having children compared to previous generations, they were already entering the stage of looking to own a home.
The implementation of working from home and shelter-in-place policies was the final straw in searching for more space and more comfortable living conditions. This has all led to affordability being its highest in five years.
…it’s proving attractive to first-time buyers
The takeaway
Home builder optimism amid the pandemic continues to drive new construction in a housing market that was already short of demand. With record low interest rates and potential buyers motivated to have extra space, housing will continue to be a leading sector of the recovering economy.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
