***Eye on the Economy is a biweekly survey of NAHB’s economic and housing analysis.
Recent data on home construction and new home sales show a slight dip after prior above-trend readings of the market. However, the long-run picture remains one of growth for single-family home building, as favorable demographics challenge existing supply-side headwinds concerning access to lots, labor and lending. Indeed, housing remains a bright spot for an economy overcoming yet another soft first quarter and dealing with financial uncertainty related to Brexit.
Despite recent economic concerns, home builder confidence, as measured by the NAHB/Wells Fargo Housing Market Index, ticked up in June to a level of 60, after four consecutive months at 58. However, when compared to prior months, the pace of single-family housing starts in May was effectively flat, standing at a seasonally adjusted annual rate of 764,000. But consistent with the favorable view of market conditions reported by builders, May’s rate marks a 10% gain in the pace of single-family construction on a year-over-year basis.
New home sales returned to trend, after an elevated rate in April. According to Census estimates, newly constructed single family homes sold at a seasonally adjusted annual pace of 551,000 in May, down from 586,000 in April, but up from the average pace of 524,000 in the first quarter. Builders are cautiously meeting existing demand and adding to inventory in line with the pace of sales. The inventory of new homes for sale increased to 244,000 in April, up from 210,000 one year earlier, and represents a 5.3 months’ supply given the current pace of sales. The increasing pace of sales and level of inventory has steadily maintained the months’ supply between five and six months during the recovery, and modestly above the four months’ supply that prevailed pre-boom.
A positive factor with respect to inventory is that the volume of existing home sales is rising. According to NAR estimates, existing home sales reached their fastest pace in May since February 2007. And inventory of resales remains tight. Existing home inventory increased 1.4% in May, but remains 5.7% lower than its level a year ago. At the current sales rate, the May unsold inventory represents a 4.7-month supply, unchanged from April. The portion of homes that sold in May after being on the market for less than a month (49%) was the highest since May 2015.
Due to this modest building growth trend and rising existing home sales, housing stands out as a bright spot amidst an overall economy with numerous concerns. The final estimate of first quarter GDP growth showed an expansion of only 1.1%. While that estimate is better than the initial 0.5% for the start of the year, drags from business investment and net exports held back economic growth.
However, current data suggest a modest rebound for the second quarter, with growth in GDP of at least 2%. This, despite widespread financial concerns that arose this week due to the U.K.’s decision to leave the European Union – the so-called Brexit. Financial and currency markets reacted dramatically to the downside, but the economic consequences of Brexit for the U.S. are likely to be modest. The larger concern is political, particularly whether there are growing political preferences against international trade. Such policy trends would harm economic growth in the decade ahead. But in the short-run, Brexit is once again causing a flight-to-quality effect, where investors seek out US Treasury bonds to hedge against risk, holding down both U.S. bond yields and mortgage interest rates.