On Saturday, at an average home, on an average road in Maplewood, New Jersey, the realtors staged an open house. Even for a January, this was a rare event and parking was at a premium as dozens of mostly young couples lined up outside, braving cold and Covid. There was a whiff of desperation in the air as the multitude assessed its own numbers. The more experienced in the crowd, though well-armed with bank pre-approvals and hefty down payments, shared in the general pessimism, knowing that the property would go quickly and for well above asking.
The 21st century has seen a wide variety of housing markets with massive booms and busts. However, never in all these years, have there been so few properties on the market. In December, according to the National Association of Realtors, homes for sales hit a record low of just 910,000. This compares to 2.5 million homes in the average month in the 20 years before the pandemic and 2.2 million homes in the average December over the same period.
The pandemic has clearly contributed to this shortage. Again according to the National Association of Realtors, new listings of residential property, which had averaged just over 5.2 million units annually from 2017 to 2019, fell to 4.5 million units in 2020 and 4.3 million units in 2021. The pandemic likely deterred many potential home-sellers both for medical reasons and the general uncertainty it created. Lack of inventory also begets lack of inventory—many people are understandably reluctant to sell their old home if they doubt their ability to find a new one.
Beyond pandemic effects, weak home building in recent years has contributed to today’s housing shortage. From a peak of almost 2.1 million housing starts in 2005, starts plummeted to under 600,000 in 2009. They have risen in every year since, reaching 1.6 million units last year. However, years of low building activity cut the stock of year-round vacant homes from 10.9% of all housing units in 2009 to just 8.0% by the end of 2020 with a slight recovery to 8.2% by the third quarter of last year. The 2009 peak reflected a bubble mentality and a reasonable equilibrium level is undoubtedly much lower. However, 8.2% is likely too low and it will take years of strong homebuilding activity to get back to a more balanced market.
On the demand side, while low immigration is limiting the growth in the number of households, low mortgage rates and a boom in financial markets has boosted the financial capability of many potential home-buyers, leading to spectacular price increases. Indeed the average price for an existing single-family home sold in December was up 9.6% year-over-year and 20.4% over the prior two years. While sellers can celebrate this trend, it is, of course, negative for homebuyers and probably exacerbates wealth inequality trends within the United States.
So how will this all play out? The next year should see the return of some balance as homes held back from the market during the pandemic are finally listed. Higher mortgage rates, courtesy of Fed tightening, should tame the growth in home prices. Meanwhile, homebuilders will likely ramp up activity to take advantage of a hot market. All of this being said, shortages of building supplies and construction workers will constrain the growth in new houses and it will take time to absorb all of today’s discouraged house hunters. The bottom line is that, while we may now be passing the extremes of low inventories and high price increases, absent a recession, the long road back to normal could keep homebuilding strong for years to come.
Of course, the housing market is only one small part of today’s economic picture. On the pandemic, the good news is that confirmed cases appear to have peaked nationally and are falling quite fast in the North East. This still suggests that, barring an even more contagious variant, the pandemic could subside over the course of the next two months, allowing more normal social activity to resume. The bad news is that omicron has clearly inflicted a significant hit on the economy in January. While we expect this Thursday’s report to show real GDP growth of close to 7% annualized in the fourth quarter, this could slip to just 1% annualized in the first.
We also believe that omicron is hurting the labor market and last week’s increase in unemployment claims could be sustained in this week’s report. Moreover, the January jobs report, due out at the end of next week, could show some weakness and underscore the huge absentee problem caused by the latest Covid wave. We also expect this Friday’s data to show year-over-year PCE inflation of 5.7% overall and 4.8% excluding food and energy—both far above the Fed’s long-term target of 2.0%.