Zillow Market Pulse: August 19, 2020

August 19, 2020

Home construction activity surged in July, as builders try to do their part to address the inventory shortage. Despite rising mortgage rates, homebuyer demand is holding firm. And more signs are emerging that the labor market's recovery is waning.

Homebuilders put their foot on the gas

• July housing starts rose 22.6% from June and 23.4% from July 2019
• Building permits spiked 18.8% on the month, its strongest monthly increase since 1990

Homebuyer demand remains firm

• For-purchase mortgage applications increased again last week, rising 1% on the week and 27% from a year ago
• The improvement came as mortgage rates jumped in reaction to a new policy from the FHFA

More signs of slowing in the labor market

• According to Indeed, there are 20.3% fewer job postings as of August 14 than there were at the same point in 2019
• The spread between this year and last widened for the first time since April

So what? 

Based on recent positive home builder optimism and home buyer trends, it's no surprise that July's home construction figures were strong. As evidenced in a report released earlier in the week, confidence among homebuilders has recently surged to record levels as builders see increased buyer interest in new construction homes, and that optimism appears to have directly translated into a remarkable pace of building. Housing starts through July are up 4.3% compared with the same period in 2019. Newly built homes seem to have grown in popularity in recent months, in part due to a shortage of existing for-sale homes, but also possibly due to growing desire among home shoppers for a never lived-in house. However, threats to this optimistic outlook remain and may even be on the rise. High levels of unemployment and the uncertain future of the next wave of fiscal relief are two such headwinds, and home construction is a slow-moving process that is often slow to respond to changing trends. But given the enduring inventory shortage, and still-rising home buying activity - for the time being - there appears to be very little reason for builders to take their foot off the gas pedal anytime soon.

Even as few homes are available for sale and mortgage rates have risen sharply in recent days, buyer demand continues to press on as the summer season nears its unofficial end. A release from Ellie Mae showed that just under 80% of all purchase loans applied for in the previous 90 days closed in July – a rate that is up from 74.2% in June and consistent with the share that closed in July of 2019. This improvement suggests that, despite tight lending conditions, a growing share of mortgage applicants are able to make their way through the entire process and that lenders are able to keep up with this growing demand. What's more, the average loan size of a for-purchase mortgage application rose to a new all-time high of $367,800 last week, 13.7% above the level at this time last year and 3.1% higher than the average size just before the pandemic began — a trend that suggests upward pressure will remain on home prices in the near future.

One factor that could diminish homebuyers' outlook is of course the fate of the labor market. Recent evidence has suggested that while the job market continues to improve, its recovery has decelerated. According to job site Indeed, the number of job postings as of August 14 was 20.3% lower than the same time last year, an annual difference that widened last week for the first time since April. To be fair, August of 2019 saw a notable spike in job postings, but the increased spread between this year and last was also driven by a leveling off in the number of postings currently open. The report states that there are about half the number of postings for hospitality and tourism jobs right now as there was this time last year, while retail job openings have fallen almost 12% since the end of July. Meanwhile, separate research from the RAND Corporation outlined how a growing share of layoffs that are being deemed persistent rather than temporary is being driven by a large share of people transitioning from the latter category to the former — workers who expected their jobs to return but have since been told otherwise. According to the report, 20% of May and June's persistent layoffs had been temporary layoffs in the month before. Understanding this dynamic will be crucial in determining how lasting the unemployment situation is and the most effective policy solutions, especially if job postings resume their improvement.

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