Zillow Market Pulse: September 18, 2020

September 18, 2020

After a torrid 3-month stretch, home construction activity took a step backward in August. Consumer optimism is on the rise heading into the fall. And labor market data continue to offer conflicting trends.

Home construction takes a slight step back

• August housing starts fell 5.1% from July, but were up 2.8% from a year ago.
• Building permits overall fell just 0.9% from July, and single-family permits rose 6% on the month.

After a slow start to the summer, consumer optimism improved in September

• The University of Michigan Index of Consumer Sentiment ticked up 4.8 points in September from August, to 78.9, its highest level since March.
• As of July, 65% of respondents said they believed it was a good time to buy a house.

The job market continues to offer mixed messages

• The unemployment rate fell in August from July in 41 states, and stayed constant in 7.
• But job postings, unemployment claims and hiring data point to slowing labor market improvements.

So what? 

After a months-long stretch of unexpected - and, at times, unbelievable - strength, new home construction activity took a slight step back in August as a series of longstanding obstacles finally caught up to builders. The price of lumber and other key materials has become extremely volatile in the face of high demand and uncertain supply, and buildable lots in good locations are in as short supply as ever. Roughly flat permitting activity shows that builders' intent is there and that they recognize the need for their products, but a stepback in starts was probably inevitable in the face of these hurdles. Still, builder confidence hit an all-time high in August and has only improved since then. The housing market has shown remarkable resilience through the pandemic, and in many regards, the new homes sector has led the charge. A shortage of available for-sale existing homes, still-low mortgage rates and a possible and likely shift in preference toward new, never lived-in homes are all combining to drive business to home builders, and this will likely continue well into the fall. The torrid pace set in the spring and summer was maybe never sustainable, but 2020 should still shape up to be an unexpectedly bright year for the home construction industry.

Following a lackluster start to the summer, it appears that consumer confidence is back on the upswing. The University of Michigan's Index of Consumer Sentiment fell sharply in July and slid further in August, as consumers grew skittish about their personal financial prospects and labor market weakness as fiscal relief programs neared expiration. But the economy has shown signs of resilience in the last couple months, continuing to improve though at a slowing pace, and it appears that consumers may believe the worst is behind them. The one-month improvement in September's forward-looking Expectations Index was the strongest in more than a year. Yes, we've seen this movie before – sentiment rose strongly in late spring, only to retreat later – and there are several factors that could cause more downward shifts in coming months. But today's release was a good indicator of the endurance — if not the speed — of the economic recovery. Despite the pullback in sentiment over the summer, optimism regarding home purchases continued to improve. In July (the most recent date for which underlying data are available), 65% of respondents said they believed it was a good time to buy a house – up from June and in line with the levels from late 2019. Just under half of respondents said they felt it was a good time to sell that month, up 8 percentage points from June.

The official unemployment rate fell in August from July in 41 U.S. states, was flat in seven and increased in only two – Rhode Island and Kentucky — according to the Department of Labor. The report added context to the national figures released two weeks ago and was the latest evidence pointing to a recovery in the labor market that has been swifter than most predicted. But the labor market is still undeniably in grave shape, and recent data suggest that the recovery may be slowing more quickly than first assumed. Slightly more than 1.5 million claims for unemployment insurance were filed last week – down from last week but still remarkably high, particularly this far into the economic crisis. Yesterday's report was the 26th consecutive weekly release that was worse than the worst week in the Great Recession – exactly half a year's worth. Hiring data have stalled as well. Job postings were down 19% compared to this time last year, according to a report from Indeed, a gap that has barely changed since late July. And the Census Bureau's Small Business Pulse Survey showed that 10.4% of businesses are decreasing their employee count – a rate in line with recent weeks — versus just 6.4% that are hiring more workers.

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