May 21, 2021

Demand remains high, but rising prices and limited inventory contributed to the third straight monthly decline in existing home sales. Homebuilders remain confident, but supply constraints are also limiting their activity. And borrowers with lower credit scores make up the largest share of those homeowners left in forbearance.

Home sales step back as demand continues to outweigh supply

• 5.85 million (SAAR) existing home sales were recorded in April, 2.7% fewer than in March.
• The median price of an existing home sold in April rose 19.1% year-over-year to $341,600.

Rising materials prices, lot shortages, limit home construction activity

• April housing starts totaled 1.569 million (SAAR), down 9.5% from March.
• Prices remain 5x higher than they were in April 2020.

Remaining forbearance participants largely consist of lower-income/lower-credit score borrowers

• Almost 30% of all mortgage borrowers with a credit score of less than 620 have participated in forbearance at some point since the pandemic began.
• 13% of all mortgage borrowers were in forbearance for at least one month over the past year.

So what? 

Red hot housing competition is pushing home prices up at their strongest pace in decades, and sales are occurring at lightning speed, often for well above list price. But signs are emerging that this elevated level of competition may be starting to wear on buyers’ confidence and could be holding back sales volumes somewhat. Last month, existing home sales recorded their best bottom line in any April since 2006, but the decrease from March marked the third consecutive monthly decline. And after falling this week, purchase mortgage applications have decreased week-over-week in 6 of the last 8 weeks and are now slightly below pre-pandemic levels. The combination of rising prices and limited inventory may be starting to weigh on buyers, particularly lower-income households and first-time home shoppers who have a more difficult time saving increasingly lofty down payments. A report released last week showed that more people thought it was a bad time to buy a home than a good one – the first time since 2010 in which that’s been the case. But while buyer sentiment may be starting to waver, sellers appear to be growing more confident — a key development on the road back to a more balanced market that may be somewhat easier on buyers. New listings volume got a decent bump in March and April, and more people believe it’s a good time to sell a home than at any time since the pandemic began. While what people say is far different than what they do, any indications of an uptick in home inventory are a welcome sign in a market where supply is struggling to keep up with red hot demand.

While homebuilders continue to put up homes at a strong rate, and remain very confident about the path forward for the industry, uncertainty brought about by rapidly rising materials prices may be starting to limit how many homes they’re able to construct. Global supply shortages are helping push the price of a number of homebuilding materials upward. Despite recent declines, lumber prices are still more than four times higher than what they were at the beginning of 2019. Some builders are reporting changed practices in response to the challenges, including limiting the sales of custom homes and capping volume so as to not burn through their existing inventory of materials. Others are pointing to a shortage of buildable lots as an increasingly binding constraint. And in an environment where starting construction on a home might be the most difficult step in the process, the share of homes authorized but not yet started surged to the highest level recorded since data collection began in 1999 — a sign that builders are waiting for some sales certainty before committing to put hammer to nail. So while builders continue to see a golden opportunity to help address the shortage of for-sale homes in a hotly competitive market, it appears that maintaining the momentum they’ve built in the past year will become more difficult to maintain going forward.

Despite increasing this week from last — only the second such increase in the last three months – just 2.18 million loans remain in forbearance according to Black Knight, down about 20% from the end of January. According to a recent report from the Federal Reserve Bank of New York, almost two thirds (65%) of the mortgage holders that received forbearance protection at some point since the program began have since exited, and those that remain in the programs are those with lower credit scores. More than half of the ~30% of mortgage borrowers with credit scores of less than 620 – the lowest tier considered in the analysis – who have participated in forbearance at any time since the pandemic began continue to receive assistance. The data in the report illustrate the importance of how these loans are handled once protections expire, in order to prevent as many as possible from falling into foreclosure. A number of programs – including a proposed policy from the Consumer Financial Protection Bureau that essentially prevents foreclosures until 2022 – should assist in limiting the damage.

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