Market for New Homes Shows Promise as Rates Hang Low

July 20th, 2020 by Drew Vass

As COVID-19 continues to dampen the U.S. economy, the housing market waved a flag of relief in July, indicating that homebuyers are ready to move again under the stimulus of record-low interest rates. According to Federal Home Loan Mortgage Corp. (Freddie Mac), the average rate for 30-year fixed-rate mortgages fell to 2.98% last week. Meanwhile, new home demand is increasing as buyers seek lower density markets, such as small metro areas, rural markets and exurbs, says National Association of Home Builders (NAHB) chief economist, Robert Dietz. Combined, those and other factors have preliminary expectations for new home sales registering above July 2019.

The NAHB/Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members in order to weigh the strength of the single-family housing market. The index gauges builder perceptions for home sales, asking them to rate current sales and expectations for the six months ahead, as well as the traffic of prospective buyers. Each index is seasonally adjusted, then weighted to produce the HMI, with a measurement of 50 or more indicating that more builders view conditions as good than poor. After three months of decimation and a low of 30, the July 2020 rating registered seven points higher than July 2019—jumping a full 14 points from June 2020 at a ranking of 72. The current July index is the highest on mark for the month since 1999 and the second highest for July on record. The July 2020 measurement also out registers every month from last year, with the exception of December.

Builders are seeing strong traffic and lots of interest in new construction as existing home inventory remains lean,” says NAHB chairperson Chuck Fowke, also pointing to low interest rates as a stimulus.

July readings were especially favorable to current single-family sales and single-family sales expected over the next six months. Meanwhile, traffic of prospective buyers came in at a measurement of 58, though it’s worth noting that number is the highest shown in the six months ahead of COVID-19 and a full 10 points higher than July of last year.

Regionally, the most promising numbers are in the western portion of the U.S., where the HMI came in at 80—six points higher on a year-over-year basis and nearly 50 points higher than April.

While these measurements provide hope to industries tied to housing and new construction, “challenges exist,” Dietz warns. Chief among them are lumber prices, which are currently at a two-year high, but builders also report rising costs on other materials, he says. Other factors that have held back construction in recent years persist as well, including the availability of lots and labor. “Nonetheless, the important story of the changing geography of housing demand is benefiting new construction,” Dietz says. “New home demand is improving in lower-density markets … as people seek out larger homes and anticipate more flexibility for telework in the years ahead. Flight to the suburbs is real.”

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