Zillow Market Pulse: October 19, 2020

October 19, 2020

Homebuilder confidence remains at historic highs, despite a small seasonal slowdown in buyer activity. Consumers are also growing more confident, but are more hopeful about their longer-term prospects than they are about current conditions.

Homebuilder optimism continues to find new highs

• The National Association of Home Builders' (NAHB) Housing Market Index rose two points in October to 85, a new record.
•  The index has risen 52 points from April.

Demand for homes remains firm, despite slight slip in mortgage applications

• September mortgage applications for new home purchases fell 5% from August, but remain up 38% year-over-year.
• The index is non-seasonally adjusted, and suggests that homebuying activity remains very strong.

Consumers bullish on the longer-term, bearish on short-term prospects

•  The University of Michigan's Index of Consumer Sentiment increased 0.8 points in October from September, but remains down 15% year-over-year.
•  The forward-looking Expectations index improved on the month, but a measure of current economic conditions fell by 2.9 points.

So what? 

Already at its best-ever level in September, the NAHB's Housing Market Index, a reading of homebuilder optimism and expected sales volume in coming months, set a new record in October. The news continued a strong stretch for the new homes sector – even compared to the broader market – as a combination of record-low numbers of existing homes listed for sale and still-robust levels of buyer demand has consumers' clamoring for more new homes to be built. But despite the enduring demand and optimism among builders, evidence suggests there is room for far more home construction than what is currently taking place. A separate report from the NAHB showed that the gap between single-family home starts and single-family sales levels is as wide (in the wrong direction, with sales widely exceeding starts) as it has been since at least 1963, when the data begin. This deviation is partly due to a surge in demand – more new homes were sold in August than in any month since 2006 – but it also speaks to the supply-side challenges involved in building homes in 2020, particularly at a favorable price point. Shortages of land and labor, volatile lumber prices and time-consuming pandemic-related requirements tacked on to construction timelines also present meaningful constraints.

A NAHB measure of builders' sales volume expectations over the next six months also rose to its highest-ever level, suggesting that homebuilders expect the surge in homebuyer demand to continue into 2021. A separate report from the Mortgage Bankers Association reinforced the idea that demand for new homes remains very high, but also flashed some signals that interest may be slipping just slightly in line with seasonal patterns. The MBA's Builder Application Survey showed that September mortgage applications for new home purchases were 38% above last September's levels, but down 5% from August's activity. This finding is consistent with the MBA's broader read on mortgage application activity, where levels have fallen slightly in recent weeks but remain near their highest point in more than a decade. Citing the new home-specific figures, the MBA believes that the seasonally adjusted rate of new home sales in September will be slightly below August's levels. Those figures are due to be released early next week. 

The preliminary results of October's University of Michigan Survey of Consumers offered a mixed view of a consumer base that remains concerned but is becoming moderately more hopeful. The overall Index of Consumer Sentiment rose from September to October, but by only 0.8 points – well below the previous month's 6.3-point monthly improvement. And while the overall index improved, views of the current situation and what's to come differ significantly. Consumers expressed hope that the economy will continue to improve in the next six months – the forward-looking Expectations Index ticked up 3.2 points on the month – but it's clear from the release that people are growing uneasy with the current state of affairs. The Index of Current Economic Conditions fell 2.9 points, its second downtick since June, suggesting that the enduring strife in the labor market, recent upticks in COVID-19 case counts and the absence of additional federal assistance may be contributing to people's pessimism. Retail sales figures notched a big jump in September, offering hope for a reacceleration of consumer spending, but today's data suggest that the improvement in sales may not indicate a durable rise in optimism.

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