Alan's Alert 7-21-2021

 

The housing starts and building permits data came out yesterday.  It was a mixed bag.  All housing starts were up 6.3% month-over-month to a seasonally adjusted rate of 1.643 million in June.  Looking at single-family starts, they were up 6.3% to 1.16 million.  The West dominated the stats, up 12.6%, followed by the south at 9.7%.  Both the Midwest (-7.5%), and the Northeast (-9%) dropped.

However, building permits were down 5.1% from the previous month to a rate of 1.598 million.  They missed market expectations of 1.7 million.  This is the third month in a row of declining building permits.  All regions saw decreases.

The cost of materials and the skilled labor squeeze is warping the housing market.  Its consequences are felt in these statistics.  Builders with approved permits are still building, but they are reassessing future projects and not applying for future permits.  Higher costs are getting passed on to buyers but builders must be concerned that a limit will be hit.  Another factor that plays into the building permits is suitable land to build on in desirable areas.  Permitting issues can run into restrictions when they butt up against zoning laws.  These two stats typically run congruent and at some point, they will have to move in unison once more. 

Another factor playing into this dynamic is the active listings and new listings of housing.

 

Both are showing signs of a rebound.  This could be the beginning of the housing market supply, finally catching up with demand and could signal an end to the insane bidding wars for houses. 

 

Locally, I hear many stories of houses going for well over asking.  It is regularly the rule, not the exception.  In fact, I was recently looking at a house that was listed for $350k.  Zillow had their Zestimate for this house at $332k.  The house was listed as a 5 bedroom but the downstairs bedrooms didn’t have egress windows.  This is a big no-no in the industry.  My realtor told me that the selling agent would review all offers with the owner on Wednesday.  The Monday before, I got a call that the owner had already reviewed an offer and accepted it for $390k.  This kind of “soft fraud” is a signal to me that a top in the market is coming.  When the “soft fraud” begins to lead to “hard fraud”, a serious correction similar to 2008 becomes more likely. 

 

 I don’t believe we’ll see a 2008 styled correction in the housing market.  More likely, we’ll see a top, then a period of slight decline or stagnation where a new base forms.  As a reminder, Robert Shiller came to the conclusion in his book, “Irrational Exuberance”, that long term trends in home prices are a direct result of inflation.  I wrote about this back on June 29^th.  Here is the link.  If the perpetual inflation story stays intact, this top in the housing market could be a short breather before housing prices resume their rise.