February 19, 2021

Existing home sales started the year on the right foot and set the stage for a strong year to come. Homebuilders remain optimistic, despite mounting challenges. And rising inflation expectations helped propel mortgage rates much higher.

Existing home sales set the stage for a strong 2021

• January existing home sales rose 0.6% from December and 23.7% from January 2020, to 6.69 million (SAAR).
• The monthly increase was in line with Zillow’s forecast.

Despite a small stumble to start the year, home builders remain ready for a solid spring

• January housing starts fell 6% from December and 2.3% from January 2020, to 1.58 million (SAAR).
• Permits for future housing projects rose 10.4% from December and 22.5% from last year, to 1.881 million (SAAR).

Mortgage rates surged higher on growing inflation expectations

• Retail sales in January jumped 5.3% from December, well above expectations.
• A report from the NY Fed highlighted the strength of the mortgage market in late 2020.

So what? 

January’s existing home sales figures turned the page on the best year in almost a decade and a half, marking a solid start for 2021 and setting the stage for what should be another banner year for the housing market. The report reinforced that the factors which contributed to a surge in buyer demand in the latter half of 2020 – specifically low mortgage rates, demographic tailwinds and many buyers reconsidering their housing needs amid the pandemic – are still very much in play in early 2021. It’s not all rosy: The pace of monthly sales growth has slowed, and steep price appreciation will introduce affordability challenges for many looking to enter the market. Brutal winter weather currently crippling much of the country also poses headwinds for the market in the near term. Still, the low-rate environment and persistent demographic shifts suggest that sales volume should remain elevated throughout 2021, especially as the economy continues to improve. The 0.6% monthly increase in the seasonally adjusted annualized rate of sales was in line with Zillow’s forecast for the month.

Housing starts and completions lagged behind expectations last month — perhaps not coincidentally at the same time as lumber prices surged — but a strong monthly improvement in permits suggests builders remain eager to work as the spring approaches. Framing lumber now costs more than double what it did this time last year. Land and labor shortages also continue to hinder the ability to take on new projects. Still, builders earned some benefit of the doubt with the way they handled these hurdles in 2020, and optimism remains high so far in 2021. The National Association of Home Builders Housing Market Index – a measure of builder confidence – ticked up one point in February to 84, just short of an all-time high. And January’s solid gain in permits was a clear sign that this optimism is translating into actual business plans. Low mortgage rates and a demographic wave continue to buoy demand for housing to begin 2021 and builders appear eager to get to work. The mixed results on home construction in January prove that the industry is not immune to setbacks and hiccups, but is also resilient as the spring approaches.

Mortgage rates surged this week, rising at their fastest pace in months as the market shifted expectations for interest rates and inflation. Wednesday’s very strong read on retail sales – the main driver of consumer spending, which makes up about 70% of GDP – was the latest indication that the economy is continuing to gradually improve. Investors appear increasingly wary that more fiscal relief and accelerating economic growth through increased vaccination rates could translate to higher inflation. This, in turn, would reduce the value of bonds’ fixed-payments and possibly lead the Federal Reserve to raise interest rates – placing more upward pressure on yields and mortgage rates. While this shift in outlook suggests that the days of all-time low mortgage rates may be behind us, mortgage rates still remain historically low and continue to offer friendly financial conditions for those looking to purchase a home or refinance. The Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, released this week, illustrated both the overall strength of the mortgage market and just how helpful these low rates have been for consumers. According to the report, $458 billion in home purchase loans were originated in 2020’s fourth quarter alone, more than any quarter in the report’s history, which dates back to 2002. And 71.3% of all loans originated in the quarter (purchases and refinances) went to borrowers with credit scores of 760 or higher – the highest share in the report’s history.

Click here to read past editions of Zillow’s Market Pulse updates.