As of now the economy is in a state of flux, according to Ali Wolf, chief economist at Zonda, during the latest COVID-19 Update webinar. The stock market is moving up and down, consumer confidence has fallen to a seven-month low, worries about inflation are rising, and the specter of potential government shutdown has loomed over the past week.
“The biggest question on the economic front is, where do we go from here?” says Wolf. “There’s so many moving parts. There’s good news, we’re growing. There’s bad news, there’s uncertainty, there’s volatility. For any of us trying to forecast, how do you make sense of it?”
While Wolf expects the economy to continue to grow, her prediction is that the pace of that growth will decelerate. The apparent end of stimulus checks also signals the end of the “blockbuster numbers” associated with a large economic cash flow. And job recovery is expected to come in “fits and starts,” with a full recovery expected within 14 to 18 months. Risks include the influence of federal policy, the emergence of variants, inflation, and access to labor.
Nonfarm payroll employment, which rose steadily by almost a million jobs per month at the beginning of the summer, only rose by 235,000 jobs in August—a drop attributed to the delta variant surge. Professional and business services led employment growth, while leisure and hospitality, which had been growing, remained unchanged in August.
Total nonfarm payroll numbers are still down by 5.3 million workers from March 2020. Wolf notes that residential is near fully recovered, up almost 80,000 workers since February 2020, with 320,000 job openings in the construction sector.
Inflation Concerns
Looking at year-over-year changes, the latest data shows a 3.6% inflation growth, albeit growth that is presently leveling off, as compared with a “healthy” 2% average goal. The sectors with the largest two-year changes in inflation include food, motor vehicles and fuel, furniture, and appliances—sectors strongly impacted by COVID.
According to Wolf, based on the data and analysis available, economists are divided on whether the present inflationary environment will be transient or longstanding. One way or another, rising inflation poses a risk for the economy—and for housing in particular, given its influence on interest rates.
Wolf says that the Fed anticipates that inflation will fall back down to 2%, but are not clear on how quickly that will occur. Among the indicators the Fed is using to monitor this prediction are rent growth, spending on goods versus services—particularly as supply chain bottlenecks delay goods—whether wage gains are raising the prices of goods and services, and inflation expectations.
Are We in A Bubble?
As outlined in Wolf’s recent opinion piece in Fortune magazine, one of the most frequent questions she receives is whether or not the economy is presently in a bubble, much as it was before the Great Recession. As Wolf defines a bubble—a condition where the price of an asset is rising faster than fundamentals can justify, then suddenly falling faster than fundamentals—she does not believe these conditions are being met. Rising prices alone, she says, are not a sign of a bubble.
Given the question of whether today’s home prices are justifiable, Wolf cites strong demographics, rising wealth accumulation, low inventory, high migration, low interest rates, and strong financial safeguards as fundamental price drivers. As an example, millennials are presently in their peak home-buying age bracket, and the financial conditions of the pandemic have enabled them to save more and defer student loan payments without consequence—giving them more money for a down payment. At the same time, baby boomers and Gen Xers who already own homes have gained equity in the tens of thousands.
One strong argument against a bubble is the financial safeguards put in place following the Great Recession. Mortgage credit availability has fallen from astronomical highs in 2007 to a relative low in the years following. This means that buyers qualifying for mortgages are usually coming in with great credit scores and low debt-to-income ratios.
However, justification by fundamentals does not indicate a healthy market. Cities like Boise, Idaho; Phoenix; Riverside, California; Tampa; and Raleigh, North Carolina, have seen price growth between 20% and 50% YOY. Unhealthy signs include the return of investors, bidding wars, fear of missing out, and the looming specters of rising interest rates and the end of qualified buyer demand.
Real-Time Housing Stats
While new-home sales have fallen by 14% YOY, the comparison is “apples to oranges,” according to Zonda senior managing principal Tim Sullivan. This time last year, community counts were higher, vacant developed lots were more available, demand was far stronger, and sales caps were not in place. Over 90% of respondents to Zonda’s builder survey report executing on some kind of supply control in their sales strategy.
According to Zonda’s regular builder survey, the present seasonal conditions are giving some crews time to catch up on their work, but cycle times are still heavily stretched. Pricing is plateauing in some areas, and incentives are back for some communities, markets, and builders. Community count is expected to rise slightly toward the end of the year, and supply chain delays and slower lot deliveries are among the biggest challenges at present.
Base price increases are beginning to plateau; 38% of builders reported they have not raised base prices in September, while almost half said they raised base prices by $5,000 or less.
Eighty-two percent of builders reported labor shortages, up from 69% last month, and 54% cited land disruptions, up from 40% last month. Supply shortages across a large number of product categories are creating construction delays at different stages; a full 60% of builders reported delays in receiving windows and doors, while 35% reported delays in garage doors, 29% in HVAC equipment, and 28% in appliances.
Forty-six percent of builders said sales were flat month to month, while 32% reported they had risen. Twenty-eight percent reported a rise in cancellations month to month, while 57% have raised base prices over the same period; 30% reported higher traffic from September to August, while 29% reported a drop.
The next COVID-19 Update webinar will take place Nov. 10 at 11 AM PST/2 PM EST. Click here to register.
