Friday, January 22, 2021

A version of this article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Supply down, prices up, and a strange decade to come.

The U.S. housing market faces a fascinating decade ahead.

On Thursday, data on housing starts and building permits showed the construction of new, single-family homes is now happening at the fastest pace since 2006.

But this acceleration of new construction is not likely to be nearly enough to meet demand in a market that remains severely supply-constrained while interest rates and relocation booms continue to fan the flames of price appreciation.

As data from the Federal Reserve show, we saw more than a decade of depressed construction activity following the housing bubble and this supply dynamic is what a fast growing market is running into today. As of November, there were just 2.3 months of supply on the market with the average home taking just 21 days to sell. Data on December’s inventory squeeze are due out next week.

And while a retrenchment from the housing industry is to be expected after a bubble and collapse, the broader economic recovery during the mid-2010s combined with consistently low interest rates steadily drew down inventories and pushed up prices. Data from S&P/Case-Shiller showed that as of November, housing prices in the U.S. were at a record.

Though as Mark Fleming, chief economist at First American Financial, noted in an appearance on Yahoo Finance Live on Thursday, the sticker price of a home matters a lot less than the monthly payment. And record low interest rates have helped to keep these monthly payments reasonable even as nominal home prices rise.

Last week in the Morning Brief, we covered the suburban/urban divide in both the economic recovery and the housing market. As the economy continues to claw its way back from the initial economic shock of March and April 2020, we see suburbs generally faring better than cities.

Remote work has also enabled workers who were previously tethered to a region or city to move, with Austin, Denver, and Miami — among other metros — serving as 2020s buzziest post-NYC or post-SF relocation trades.

These dynamics, however, also influence both the price and supply trends that are currently crimping housing. Data from Redfin published Thursday showed that in markets like Nashville, Atlanta, Austin, and Houston, out of market buyers have a budget 30% or more above what local residents can afford. And as we highlighted in the Morning Brief back in November, homebuilders are currently talking about maintaining disciplined capital structures more than rushing to get new supply online.