Homebuilders See Strongest May Sales In Over A Decade, But They Have A Big Problem

Sales of newly built homes jumped far more than expected, up nearly 13% annually, according to the U.S. Census.

After slowing dramatically in March, as the coronavirus shut down the economy, they posted the strongest May pace since 2007, a recovery that surprised even the builders themselves. But housing starts were not nearly as strong, and builders are struggling to meet this new demand.

A telling point in the data: The biggest sales jump came in homes not yet started. That caused the supply of homes for sale that were under construction to drop 15% compared with a year ago.

"Sales of homes not yet under construction are rising given capacity limitations in the building industry," said Robert Dietz, chief economist at the National Association of Home Builders. "Due to labor and land constraints, homebuilders were already producing too few single-family homes given potential demand. As housing demand has picked up in recent weeks, builders have shifted sales to homes not yet under construction – a 20% year-over-year gain for such sales."

Homebuilders are ramping up hiring to meet the improved demand, Dietz noted, adding 226,000 workers in May, but they were already struggling to find skilled workers before the pandemic hit. Land and material prices are also rising. Lumber prices, in particular, recently spiked, after falling dramatically at the start of this year.

While sales of newly built, single-family homes were nearly 13% higher annually, single-family housing starts in May were close to 18% lower annually, and building permits, an indicator of future construction, were down about 10%.

Clearly the disconnect is that builders did not expect to see demand recover as quickly as it did. The stay-at-home orders from Covid-19 have bolstered already growing demand for suburban homes, and buyers are now favoring new over existing homes.

"The rapid improvement in sales of new homes may also reflect a change in consumer preferences, with buyers showing a newfound penchant for cleaner, never-lived-in homes — although the long-term durability of that trend remains to be seen," said Matthew Speakman, an economist at Zillow.

Some of the largest homebuilders, like Miami-based Lennar, slowed both land purchases and housing starts in March, only to have to quickly reboot in April. They were already, however, producing well below demand levels, as builders still haven't fully recovered from the massive housing crash caused by the subprime mortgage crisis more than a decade ago.

"There has been a production deficit in housing," said Stuart Miller, chairman and former CEO of Lennar. "We are shelter-supply-constrained, and that supply constraint means that all forms of shelter are going to thrive in the current market and probably be sustainable for the next year or two."

Some question, however, whether the demand will continue, given the broad challenges still facing the economy from the still-raging pandemic.

"The key question for housing is after this sort of pent-up demand gets satiated, will the level of employment and wages reassert itself as the main driver of the market?" said Peter Boockvar, chief investment officer at the Bleakley Advisory Group. "The other dynamic for sure will be the spending behavior of millennials, as they are the key demographic group to watch for the housing market in the years to come."

RECENT NEWS

Stocks Rise After Better-than-expected Jobs Report To Close Out Winning Week

Stocks rose on Thursday following a better-than-expected U.S. jobs report as the economy tries to recover from the coron... Read more

Record Jobs Gain Of 4.8 Million In June Smashes Expectations; Unemployment Rate Falls To 11.1%

Another big contributor to the decline of the jobless rate was a plunge in those on temporary layoff. That total fell by... Read more

17.6 Million Unemployed Americans Probably Won't Return To Their Pre-pandemic Jobs

The share of the workforce currently out of work with no reasonable chance of returning to their jobs is about 11%, or a... Read more

GM, Fiat Chrysler U.S. Auto Sales Tank In Second Quarter As Coronavirus Saps Demand

U.S. vehicle sales in the second quarter for General Motors, Toyota Motor and Fiat Chrysler plunged by more than 30% Read more

Mortgage Demand Falls For The Second Straight Week, Signaling A Potential Slowdown In The Housing Recovery

The surge in mortgage demand from homebuyers over the past two months appears to be waning, even as mortgage rates conti... Read more

Fed's Bullard Warns Of Financial Crisis Risks As Virus Cases Spike, FT Reports

St. Louis Federal Reserve Bank president James Bullard has warned that a growing number of bankruptcies due to the coron... Read more