May 28, 2021

While measures of housing demand remain elevated, consumer surveys suggest that home shoppers are growing weary as they consider entering the ultra-competitive market. New home sales slipped in April as materials prices forced builders to alter their approach. And inflation data showed prices are rising at their fastest pace in decades, but mortgage rates held firm.

Survey-based measures of home buyer confidence turn downward

• The Conference Board: 4.3% of consumers surveyed in May plan to buy a home in the next six months, down 2.8 points from April.
• The University of Michigan’s measure of buying conditions for houses slumped in May to a 30-year low.

Rising materials prices limited new home sales activity in April

• April new home sales were down 5.9% from March
• New home sales remain well above pre-pandemic levels.

Inflation pressures remain firm, but mortgage rates are undeterred

• The Core Personal Consumption Expenditures (PCE) price index increased 0.7% in April from March – the biggest monthly increase since 2001.
• Mortgage rates fell slightly this week and remain historically low.

So what? 

After nearing a 15-year high earlier in the spring, survey-based measures of home buyer sentiment have slumped in recent weeks. Data from The Conference Board suggest that 4.3% of consumers surveyed in May plan to buy a home in the next six months, the fewest since February 2013. In April, the share was 7.1% — just below the highest percentage since 2006. (Note that the survey’s results from 2021 thus far were revised this month due a change in methodology). The series tends to vary quite a bit from month to month, but the 2.8 percentage point decline from April is the largest one-month decrease in the series’ history. The Conference Board measure echoed figures shared earlier in the month by Fannie Mae – which showed that more people believe it’s a bad time to buy a home rather than a good one for the first time since at least 2010. The figures were also followed up later this week by data from the University of Michigan, whose measure of buyer sentiment plunged in May to its lowest level in over 30 years. Combined, the survey-based measures indicate that would-be home shoppers could be losing confidence in their ability to compete in a market that is one of the hottest we’ve ever seen. That said, separate surveys of realtors that highlight market activity suggest that buyer demand remains very firm and actually continues to climb. And market data seems to reinforce this – nearly 50% of homes sold in April were on the market for less than a week before going pending. What’s more, the University of Michigan’s gauge of seller sentiment spiked in May to their highest level ever. Taken together, the measures suggest that while the market remains competitive, a rebalancing of the market may finally be on the horizon, and that supply may finally be starting to catch up to demand.

New home sales volume remains well above pre-pandemic levels, but it’s become very clear that the high and volatile price of lumber and other key building materials is introducing challenges to the new home building and sale process. In order to account for uncertain prices and availability of materials, home builders are holding off on making homes available until the construction process is further along. This restriction is not due to a lack of demand – in fact, it’s likely quite the opposite. Many builders are expressing that sales could be higher if materials-related constraints weren’t there, such as high lumber prices. And while lumber prices have recently shown some indications that their meteoric rise may finally be abating, the prices of other building materials continue to grow. Despite the recent slowdown in new home sales, activity remains elevated compared to recent years: There were 683,000 new homes sold in 2019, and the current pace of sales is well on track to exceed that figure this year. Demand for new homes remains elevated, but it appears as if the home construction industry may have to start operating at a leaner capacity – with builders scaling back on construction and the time from permit to completion increasing.

The Federal Reserve’s preferred measure of inflation showed that prices rose in April at their fastest pace in nearly 30 years, and at a stronger rate than the market was expecting. But at least for now, mortgage rates and the bond yields that dictate their path have held firm. Inflation data has received outsized attention of late, as markets eagerly await signals of whether the Biden administration’s spending package will cause prices to press firmly higher – something that would, theoretically, prompt the Federal Reserve to tighten monetary policy and pump the brakes on the economic recovery from the pandemic. Such a dynamic would also weaken the underlying value of Treasury bonds, causing yields to rise and placing upward pressure on mortgage rates. The April figures were indeed well above the Fed’s stated average inflation target of 2% annual growth, but, surprisingly, markets were undeterred by the data — bond yields and mortgage rates actually fell on Friday, following the release. One reason for this muted response could be that the market – like the Fed – believes that the rise in inflation is transitory and largely due to pandemic-driven bottlenecks. Indeed, alternative measures from today’s inflation release back up that theory, and show far softer price pressures than do the headline measures. With inflation figures projected to rise further in the coming months, investors’ belief in this dynamic will continue to be tested and the path forward for mortgage rates will remain uncertain. That said, the bigger test for mortgage rates will likely be the May job figures, due next Friday.

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