U.S. Home Prices Rise Remarkably, But for How Long?

• Author: William Asher
• Posted: 2024-05-01

The housing market is one of the biggest segments of the U.S. economy. From November to the end of December 2020, the prices of homes rose at a rate of 8.5%, denoting a hopeful speckle in a year that was filled with darkness. Of course, when many parts of the economy shut down in March, no one would have imagined that the housing market would thrive.
As it turns out, in 2021, the story is the same; the sales of new homes are currently higher than they were at this time in 2020. However, critics cannot help but wonder how long the positive performance will last.
 

A Rising Demand, and a Rising Cost

According to the Commerce Department, in January, the demand for new houses increased by 4.3%; the sales of new homes increased to an adjusted annualized rate of 923,000 from the expected 885,000. Notably, in December, the new home sales figure had been revised from 842,000 to 885,000. At this time last year, the sales of new homes were 19.3% lower.
Actually, some economists, such as Robert Frick of the Navy Federal Credit Union, suggest that home builders are keeping the sales from going higher than they currently are. In his opinion, the builders are moving slowly, undercutting supply, and thereby making it difficult for Americans to afford houses.

In January, the median price of a new home went up by 5% from the previous year to $346, 400. That's the highest figure for any January on record. Over the past year, the prices have been increasing due to the record low mortgage rates that we saw last year. At the time, many Americans were seeking more space, with countless homes serving as classrooms and offices during the pandemic. The resulting demand has driven up prices tremendously, further elevating builder backlogs. Indubitably, the cost of materials and labor is rising. The Lumber futures have surged 130%, further adding a financial burden to the cost of a new home.

The Mortgage Bankers Association made a report on Wednesday that depicted a decline in loan applications to buy homes to a nine-month low. According to other data, we can expect to see the current strength in the coming months. The report published jointly by the Department of Housing and Urban Development and the U.S. Census Bureau suggests that it would take up to four months to exhaust the current supply of new homes if the current sales pace remains constant.

The Growing Concerns

On Tuesday and Wednesday, Home Depot and Lowe's reported impressive earnings and sales. Lowe's earnings were actually better than what it had expected, and Marvin Ellison, its CEO, attributed the success to "consumer focus on the home."

Although the Federal research is set to maintain its key short-term rate as low as possible for the foreseeable future, the rising interest rates could prove problematic for Lowe's and Home Depot. Notably, the longer-term bonds have begun surging, and we cannot forget that the 10-year Treasury influences the mortgage rates more than the Fed rates do.

Home Depot refused to offer any guidance for this year, and its shares slumped 3%. While speaking with analysts, Richard McPhail, Home Depo's chief financial officer said that the housing turnover and price appreciation have been driven by the rising demand for single-family homes. He also mentioned that the biggest uncertainty is tied to the course of the Covid-19 pandemic, short-term fiscal policy, vaccine distribution, and how these factors will generally impact the economy and consumer spending.

Consumers May Not Be Too Concerned

At the moment, the housing market numbers paint a relatively healthy picture. Housing consumers are still eager to get more space, and are even willing to pay more for homes. On Tuesday, the Federal Housing Finance Agency and S&P/Case Shiller reported an increase of more than 1% per month in their most recent housing price reports.
According to some economists, the two surveys suggest a robust momentum, and support the view that the housing market is still in solid footing.

It's still surprising to many of us how the housing market has remained so resilient at a time when many other segments of the economy are still struggling to get back on their feet following the effects of the coronavirus pandemic. The housing boom has clearly benefited many companies, such as the forestry companies. Although builders and some economists believe that the boom will not end just yet, we have to be prepared for anything.