Home Construction, Existing Home Sales Heat Up in July

Initial Jobless Claims topped 1 million once again, as the week ending August 15 saw another 1.1 million people file for unemployment benefits for the first time. However, the housing sector continues to show signs of strength, as builder confidence in August matched a record high. Housing Starts and Building Permits also rose sharply from June to July while sales of existing homes also came in hot – hitting the largest one month increase on record.

The manufacturing sector missed expectations in two key regions in August, however. In New York, the Empire State Index was reported at 3.7 versus expectations of 17 while the Philadelphia Fed Index was reported at 17.2 for August, which was also below expectations of 21.5

Initial Jobless Claims Move Above 1 Million Again

Initial Jobless Claims moved higher in the latest week, as another 1.1 million people filed for unemployment benefits for the first time during the week ending August 15. This was 135,000 more than the previous week. California (+201K), Florida (+66K) and New York (+62K) reported the largest gains.

However, Continuing Claims improved by 636,000 to 14.8 million people continuing to receive benefits.

Pandemic Unemployment Assistance (PUA) Claims totaled 543,000 in the latest week. These claims are not captured in the headline figure and represent people like gig workers and contractors who usually would not be approved for unemployment benefits. Continuing PUA Claims worsened by 500,000 to 11.2 million.

All in all, the total number of people receiving some type of benefits is around 28 million, which would bring the real-time estimate of the unemployment rate north of 17%.

Builder Confidence Ties Record High

Builder confidence has been on the rise in August, per the National Association of Home Builders Housing Market Index. This real-time read on builder confidence rose from 72 to 78 in August, matching the record high from 1998. Readings over 50 are considered positive.

All three components of the index were higher as well. Confidence in current sales conditions jumped 6 points to 84, sales expectations in the next six months was up by 3 points to 78, and buyer traffic rose 8 points to 65, which is also a record high.

NAHB's chief economist, Robert Dietz, said, “Single family construction is benefiting from low interest rates and a noticeable suburban shift in housing demand to suburbs, exurbs and rural markets as renters and buyers seek out more affordable, lower density markets.”

One thing to keep an eye on is lumber prices, which have more than doubled since mid-April. These cost increases could lead to higher home prices in the fall and dampen some of the momentum in the housing sector.

Housing Starts Heat Up

Housing Starts were also on the rise in July, up 22.6% from June and coming in 23.4% higher when compared to last July. Though the gain was mostly in Multifamily Starts, Single-Family Starts were up a solid 8.2%.

Building Permits, a sign of future construction, were up 18.8% from June to July and up 9.4% when compared to July of last year. Almost the entire gain was comprised of permits for single family homes, which rose 17% from June to July.

Even with the increase in Housing Starts and Building Permits, supply remains extremely tight. And since builders were not putting up homes due to the pandemic, it may be challenging for them to keep up with the demand.

According to Freddie Mac, the housing market would need to add 1.6 million single family housing units per year to keep up with the demand. Add to this the price increase in building materials like lumber as mentioned above, it’s likely we are going to continue to see a big imbalance between supply and demand - and this will be supportive of home prices.

Existing Home Sales Also Soar

Existing Home Sales, which measures closings on existing homes, were up 25% in July per the National Association of REALTORS. Because these are closings, they likely represent buyers shopping for homes in May and June. This was the largest one month jump ever and comes off the heels of June's strong report that showed sales were up 20%. First-time home buyers made up 35% of home sales, up from 34% in June.

Inventory remained tight, as there were only 1.5 million units for sale in July, which is down 21% compared to July of 2019. But even with this low level of inventory, sales are still up 9% year over year.

The median home price was reported at $304,100, up 8.5% versus the same time last year. Remember, this is not appreciation. Half the homes sold above and half below this
number.

NAR's chief economist, Lawrence Yun, noted, "The housing market is well past the recovery phase and is now booming with higher home sales compared to the pre-pandemic days. With the sizable shift in remote work, current homeowners are looking for larger homes and this will lead to a secondary level of demand even into 2021."

Of Note From the Fed

The minutes from the Fed's July 28-29 meeting were released and of particular note, the Fed said yield curve controls are offering only modest benefits. Many participants judged that yield caps and targets were not warranted in the current environment but should remain an option that the Federal Open Market Committee could reassess in the future if circumstances changed markedly.

The Bond market did not react well to this news upon its release because it was thought previously that the Fed was entertaining the idea of setting yield curve controls. This means the Fed would keep buying Mortgage Backed Securities (MBS) and Treasuries until they reached those target levels.

The bottom line is that the Fed is still buying MBS every day to the tune of $5 to $7 billion, which is helping to keep rates low. But they are not going to set targets on where yields should be.