In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi share their expert perspective on the three most important housing market statistics to follow.
Don’t miss a single REconomy episode, subscribe today.
Listen to the REconomy Podcast™ Episode 22:
“It's telling us that the housing market is still strong. Okay, okay, not as strong as in 2020, which, by the way, was the best year in over a decade. So far, it looks like 2021 is tracking very closely to 2019 in terms of purchase application mortgage demand, which, by the way, again, was the best year in a decade, prior to last year.” – Mark Fleming, chief economist at First American
Odeta Kushi: Hello, and welcome back to another episode of the REconomy podcast where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hi, Mark. You know, on any given week, there are a number of economic releases that give us insight into different parts of the economy. So, how do we know what to monitor?
Mark Fleming: Hi, Odeta. Great question. There's GDP, CPI, EHS (that's existing home sales), retail sales, the Fed dot plot that came out this week. Overwhelming, right? But fear not. That's why we are here to sift through all that data, make some sense of it and break it all down, without all the economic jargon. But, we are real estate economists, so let's just try and focus in a little bit more on which data releases are key for the housing market, not the economy as a whole.
Odeta Kushi: Indeed, and that is a perfect lead-in to our topic today, the three most important stats for the housing market. And this was very difficult, by the way, to only choose three, but we persevered. We will walk through three data releases, why they matter for the housing market, and what the most recent reports tell us. I want to start with the September new residential construction report. The latest report reflects data for August 2021. Now this report includes building permits, which are a leading indicator of future housing starts; housing starts, which is groundbreaking on new homes; and housing completions data. All of which are compiled from surveys of home builders across the country. Now, this report gives us insight into future housing supply, but it's also a key indicator of broader economic strength.
Mark Fleming: And why does new residential construction matter so much, you ask? Because for the last decade, we've been building fewer new homes than new households have been forming. In other words, demand for shelter. That's the consumption service. Remember, we had that conversation on inflation in Episode 13 about how we get the measurement of shelter from apartments and homes? Well, that consumption service, the demand for it, has grown and it is increasing faster than our ability to supply more units of it. And, now the housing market faces a severe, decade-long shortage of homes for sale relative to demand. But, even if we were able to build more new homes, remember that approximately 90% of all homes for sale in any given month are not new, but existing. I have to take a side digression here. Why do we call a used home, existing? Let's get back to it. That inventory of existing homes is sitting near a historic low. So, if you can't find an existing home to buy, a new home is a pretty good substitute. We need a lot more of them and that's why we focus so much on this monthly report.
Odeta Kushi: It sure is and, you know, builders are very aware of the need for more homes and have really risen to the challenge, but they face several supply-side headwinds, including a shortage of skilled labor, a shortage of materials and buildable and affordable lots, which slows the pace of construction. Now, in this month’s Census Bureau Report total housing starts actually increased by nearly 4% in August, which is good news. But it's important to note that the increase was due to strength for multifamily development, while starts for single-family homes actually fell nearly 3%. Now, the strength in multifamily is not necessarily at the expense of single-family home construction, because the decline in single-family starts is largely due to supply-side headwinds, as I mentioned, rather than a response to weakening demand. In fact, the number of single-family homes permitted, but not started, continues to remain elevated, up 50% year over year, a sign of ongoing supply chain issues. Now, the good news here is that homebuilder sentiment remains on solid footing and actually inched up in September, prices for lumber have continued to fall, and the number of residential construction workers has increased in 11 out of the last 12 months. But nevertheless, the pace of housing starts is currently not sufficient to keep up with demand. So, if you're looking for one key metric to follow to gauge new home supply, look no further than that monthly housing starts report. Now, what's another key stat for the housing market, Mark?
Mark Fleming: Well, we've covered supply. So obviously, we now have to talk about demand. We love high-frequency data. Maybe because we're just really that impatient. But, it helps give us a sense of whether demand for homes is falling, rising, or not going in either direction. And, for that, we look to mortgage applications from the Mortgage Bankers Association. What's better than data that arrives every Wednesday morning 52 times a year to review with your morning coffee. Or is that just us?
Odeta Kushi: Yeah, that might not be very relatable. But, we do love it. And what exactly does that data tell us?
Mark Fleming: Right, so the weekly application survey measures single-family loan application activity, based on surveys of lenders. So, we get a sense of how many applications are being made to purchase a home, or to refinance a home, every week. And this is a great leading indicator of housing demand on the purchase side, as well as mortgage demand for refinances.
Odeta Kushi: And in the beginning of the pandemic, this weekly index really started to capture the rapid decline in mortgage applications due to the stay-at-home orders and the ongoing pandemic uncertainty. But, that decline was short lived, and we quickly began to see the applications number increase. And then of course, home sales followed suit. But, what does that data tell us about demand today?
Mark Fleming: Newsflash...It's telling us that the housing market is still strong. Okay, okay, not as strong as in 2020, which, by the way, was the best year in over a decade. So far, it looks like 2021 is tracking very closely to 2019 in terms of purchase application mortgage demand, which, by the way, again, was the best year in a decade, prior to last year.
Odeta Kushi: Right. And context matters here. Because, as you mentioned, if you focus on year-over-year growth of mortgage applications this year, you'll find we're down quite a bit relative to last year. But that's only because last year there was a huge wave of pent-up demand that rushed to the market after the spring lockdown. If we exclude 2020 as a benchmark, we find, as you mentioned, that 2021 is on track for a very strong year.
Mark Fleming: That's right, and refinance demand has benefited lately, from what we're calling the "Delta Dip" in mortgage rates as some increased economic uncertainty due to the Delta variant has pushed investors into the safety of Treasury bonds. And when that happens, obviously, the Treasury yield goes down and mortgage rates go down with it. So, we monitor this weekly report very closely, with our morning coffee, to get a sense of where demand is headed in both the mortgage refinance and purchase space.
Odeta Kushi: And right now, the seasonally-adjusted purchase applications data is actually pointing to a pretty strong start to the fall. Okay, so we've covered housing starts for supply, mortgage applications for demand, and I think the third has something to do with affordability.
Mark Fleming: Oh, yes, of course, you would be correct. And that's my favorite topic. The third stat to watch is near and dear to us. It's the Real House Price Index report. Every month, right around the time of the Case-Shiller house price index release, we also publish the Real House Price Index. And, while house price indices writ large are very important to give us insight into nominal price growth, as we've discussed before, see episodes 1, 2, 20... see how we really like affordability here. When it comes to housing, affordability is not measured by just looking at nominal house prices.
Odeta Kushi: And we're gonna cheat a little bit here because the Real House Price Index is really three metrics rolled into one, and they are some of the most important metrics of all.
Mark Fleming: I see what you did here Odeta, you couldn't just pick three, so you pick two and a trio is one. Nicely done.
Odeta Kushi: Thank you. So, the three key drivers of the First American Real House Price Index or the RHPI are household incomes, mortgage rates and an unadjusted house price index. Incomes and mortgage rates are used to inflate or deflate unadjusted house prices in order to better reflect consumers purchasing power and capture the true cost of housing. Now, income in the model is partially a function of what's happening with wages on a monthly basis. So, embedded in the RHPI is the health of the labor market. So, what does the most recent report tell us?
Mark Fleming: Well, thank you for asking, Odeta. In the July report, housing affordability continued to decline, even as two of the three key drivers of the RHPI, household income and mortgage rates, swung in favor of greater affordability relative to a year ago. House-buying power, how much one can buy based on the changes in those two things – income and interest rates – increased by 3.8% compared with last year. That's not too bad, propelled by those lower rates, the Delta Dip and higher household income. The affordability gain from increased house-buying power, however, was offset, or shall we say could not keep up with the third component of the Real House Price Index, nominal house prices, because they're growing extremely fast right now, reaching a record 20% increase over a year ago. And voila, three-in-one. Why do we care about this?
Odeta Kushi: Well, if you don't know the answer to this one yet, then you must be new to our podcast. We care because nominal house prices alone don't tell us the full story. Yes, nominal house prices continue to hit record highs, even surpassing the previous housing boom peak by 35%. Yet, real, house-buying power-adjusted house prices remain nearly 38% below their housing boom peak. So, we use the Real House Price Index to get a better understanding of what's actually going on with affordability. Alright, well, that was it for the three stats to watch. There's so much more that comes into play when it comes to the housing market, everything from consumer confidence to what's going on with the Fed’s purchase of mortgage-backed securities. But, if you're looking to gauge supply, demand and affordability, look to the Census Bureau's monthly residential construction report for housing starts data, the MBA's weekly application surveys for mortgage applications data, and the First American Real House Price Index for purchasing power-adjusted house price data. And that's it for today. Thank you for joining us on this episode of the REconomy podcast. Be sure to subscribe on your favorite podcast platform. You can also sign up for our blog at Firstam.com/economics. And if you can't wait for the next episode, please follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.
This transcript has been edited for clarity.