Zillow Market Pulse: November 18, 2020
Home construction activity in October was good, not great. Household debt is up, and consumer spending is slowing way down.

Home construction activity in October was good, not great. Household debt is up, and consumer spending is slowing way down.
Home builders have their foot on the gas, but given sky-high levels of builder optimism it feels like they’re still leaving a good bit in the tank. Homebuilder confidence reached a new, all-time high for the third month in a row in November, driven by expectations of enduring buyer traffic into the new year. But this surge in optimism continues to translate to only modest growth in home building activity. Housing starts through October are up 6.7% compared to the same period in 2019, and were revised up for September, a small indication that builders are finding ways to expedite projects and get to work when and where they can. Even so, volatile materials costs and a shortage of available land continue to hold builders back from truly hitting their stride. And flat permitting activity shows that the future project pipeline isn’t exactly overflowing. As a result, it appears that builders are being more selective with the jobs they take on, with most opting to embark on single-family projects. A shortage of existing single-family homes for sale have boosted the need for more newly built ones, and it shows. Single-family home starts have risen 73.6% from April lows and are at their highest level since 2007, while multi-family (5+ units) starts have improved by just 39.2%. One of these is better than none, certainly, but the market needs an awful lot of both. October marked another step forward for home construction, but only a small one, leaving the market still waiting for the leap it needs.
Because consumer spending accounts for about two-thirds of total U.S. economic output, sluggish retail sales growth strongly suggests the pace of the economic recovery is slowing and is an ominous indicator that future months’ may be worse. The 0.3% monthly increase from September to October in seasonally adjusted retail sales was far less than the 1.6% monthly growth seen in the previous month and the weakest monthly improvement since May. Spending on vehicles, electronics and home improvement items improved in October, while spending at grocery stores, clothing retailers and restaurants all slipped on the month. The sales slowdown coincided with a drastic spike in COVID-19 cases nationwide, bringing with it the risk of further rounds of government-imposed shutdowns on many businesses and public places. Given consumers’ propensity to scale shopping activity back when cases rise, regardless of any mandates, suggests that further improvements in retail sales may be unlikely in November and December.
The slowdown in retail spending was echoed in the Federal Reserve Bank of New York’s Q3 report on Household Debt and Credit, which showed U.S. household debt rose by 0.6% (or $87 billion) in Q3 from Q2 but credit card balances were down 1.2% over the same period. Auto loan and student loan balances rose, but the bulk of the increase was driven by increased mortgage balances, up $85 billion to $9.86 trillion as originations of for-purchase loans and refinances both rose notably. The pullback in credit card balances reflects two big consumer changes. First, people are generally spending less because of overall economic strife, uncertainty and mobility restrictions brought upon by the pandemic. The other is that many people who received financial aid through CARES act programs – specifically an additional $600 weekly boost in unemployment benefits and/or the one-time $1,200 payment — used the extra cash to pay down debt. A separate report from the New York Fed showed that, on average, more than a third of those payments (34.5%) were used to pay down household debt. The report also found that aggregate delinquency rates fell across all loan types in Q3, suggesting that forbearance programs are having their intended effect.
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