The real gross domestic product rose above its pre-pandemic peak for the first time in the second quarter of 2021, signaling in at least one measure that the economy has “recovered.” In the latest COVID-19 Update webinar, Ali Wolf, chief economist at Zonda, attributes this swift recovery to the financial support provided by Congress and the Federal Reserve. However, other measures still fall short of where they stood before March 2020.
For instance, total nonfarm payrolls are steadily climbing, but still short by 5.7 million workers. While Wolf anticipates this number will continue to rise, she notes economic risks that may slow growth in the coming months—particularly the delta variant, which has surfaced as a risk to service-oriented industries just recovering.
While residential construction has gained about 58,500 workers since February 2020, the industry continues to face a shortage of workers. Still, housing continues to be the “standout star” in the current economic landscape.
New-Home Sales
Following the market “shifts” in June—buyers becoming more hesitant, more listings not selling or going through price cuts, and a return to seasonality—July’s theme is “relief,” according to Wolf.
In Zonda’s monthly division presidents’ survey, when asked how July was “shaping up” compared with expectations, 40% of builders reported that buyer demand was “on track” with what was expected, while 44% said it was slower than expected but “not worrisome.” Only 8% reported concern about a slowdown in demand. “There was slower activity in July, but what felt like a really big halt really just felt like maybe the fever broke,” Wolf says. “It’s not as crazy, but it’s not as though we’ve fallen off a cliff.”
At the same time, 29% of builders reported seeing buyers pause their home search because of rising prices, while 12% have reported pauses due to a lack of inventory. In looking through the responses, Wolf distinguishes three “camps” of builders—one that says demand has only been somewhat slower, a second that reports no change with ongoing strong demand, and a third that is not writing new contracts in July at all because they are catching up with their backlog.
Community count has fallen off sharply since the start of the pandemic and remains a “frustrating constraint” for the new-home market. Wolf does not believe the falling count will hit bottom for another couple of months. Los Angeles/Orange County has seen the sharpest drop in community count, followed by Atlanta and Washington, D.C.—all down by nearly 30% to 40%.
New-home sales have risen 2.4% year over year. New-home orders are not significantly above 2019 levels, while the average sales rate gives a better sense of the rise in new-home demand—presently falling but still above 2019 levels. Entry-level homes are outselling luxury homes by a ratio of 1.4:1.
When asked about alignments to sales strategy related to production capacity, a few more builders are taking on contract sales with a “business as usual” approach—15% as opposed to 10% in April. Wolf anticipates that more builders will shift away from capping sales within the next few months.
Over the past two years, Port St. Lucie, Florida, has seen the sharpest positive shift on Zonda’s New Home Pending Sales Index, with 150% pending sales growth since July 2019. Cincinnati follows at approximately 85%, with San Francisco at just under 80%. A majority of the top markets are in Florida or the Midwest—many of them smaller metros benefiting from migration trends.
Many of the top motivations for buying a home remain the same this year as they did in 2020, with strong incentives to buy for the majority of buyer groups. COVID-related lifestyle changes are still in force, while non-COVID lifestyle changes will always be a driver for new-home purchases. Home equity remains good, the stock market remains strong, interest rates remain low, and ongoing high demand has instilled a “fear of missing out.” Investors, second-home buyers, and foreign buyers can also still expect high yields.
According to an Indeed survey, 45% of workers see the office as less important now than it was pre-COVID. About one-third would opt for a “hybrid’ schedule if they could, while 28% would prefer to work on-site full time and 23% would want to remain fully remote. Top worries cited by respondents about going back to the office include commute time (45%), costs of commuting (38%), and loss of a flexible schedule (37%).
Given this change in attitude, distance from central business districts has become an “interesting subject,” according to Wolf. Over the past six months, a majority of major metros have seen their highest sales rates in communities 25 miles or more from the nearest central business district—though closer communities are regaining some strength, using the Bay Area as an example.
A Look at Lots
The New Home Lot Supply Index, which tracks the nation’s supply of vacant lots, is at its lowest level on record—and all of the nation’s major home markets are considered “significantly undersupplied.” Builders have been aggressively buying up VDLs, Wolf says, including lots they might not have considered a year ago giving evolving location trends.
While lots are being purchased faster than new lots can be brought to market, the measure of total upcoming lots has seen a 14% increase from the first to the second quarter of 2021, the sharpest increase in the history of the data set.
Real-Time Housing Stats
While the market is hitting a point of “normalization,” according to Zonda senior managing principal Tim Sullivan, this holds different meanings from market to market—and demand remains strong.
In Zonda’s regional director survey, 45% of builders said their sales were flat month to month, while 18% reported an increase. Eighteen percent reported a rise in cancellations month to month, 72% raised base prices in the past month, and only 14% of builders reported higher traffic from May to June while 56% reported a drop.
Base price increase amounts have shifted significantly from June to July. While the majority of price increases are still in the $5,000 range, a full 26% of builders reported that they have not increased prices at all—up 7% from June—and the share of builders making higher base price increases has receded.
Sixty-one percent of respondents reported challenges with government services, down from 67% the previous month. Sixty-nine percent of respondents cited issues with labor shortages, while 92% reported supply disruptions and 40% reported land disruptions. On the lumber side, half of builders have reported some price relief—though most of that number have not experienced as much as they had anticipated.
Market Comparisons
First-time buyers are still feeling price squeezes, and the rental market has become as competitive as the for-sale market—making reasonably priced shelter hard to find anywhere. Kimberly Byrum, managing principal and multifamily lead at Zonda, calls the current situation “the hottest market in her 30-year career.”
Many of the most active markets in the nation have seen immense rent increases—led by Phoenix, up 19% YOY; Las Vegas, up 16.5% YOY; and Riverside/San Bernardino, California, up 15.5% YOY. “There’s not an easy outlet of affordability,” Sullivan says. “[But] what it implies for pricing power is pretty impressive … rents and prices have a buoyancy effect underneath them.”
The next COVID-19 Update webinar will take place Sept. 29 at 11:00 AM PST / 2:00 PM EST. Click here to register.
