What If Nothing Is ‘Transitory’?

“Buyers likely want to secure a home before mortgage rates increase even further next year,” NAR chief economist Lawrence Yun said Thursday.

He was referring to a surprisingly robust read on existing home sales for September.

The 6.29 million annual rate was the highest since January (figure below) and the 7% monthly increase the largest in a year.

Yun noted incremental improvements in supply which helped “nudge” up sales.

Earlier this week, government data showed housing starts fell in September while permits dropped the most since February.

A year on from the pandemic-inspired property boom, it’s impossible to know how much weight to assign to the housing numbers. In fact, it’s becoming more difficult to determine what is and isn’t worth covering in terms of incremental data (any data) at a time when the US economy is essentially in limbo, adrift somewhere between a stimulus-fueled sugar high and a slowdown exacerbated by waning fiscal and monetary impulses.

In a sea of ambiguity, the housing market is perhaps even more difficult to read than the labor market. As I put it Tuesday, you can tell pretty much any story you want to tell, because when it comes to explaining the persistence of various imbalances, the list of contributing factors is a mile long.

Prices are stratospheric. The median existing-home price last month was nearly $353,000. That was up more than 13% YoY. Prices rose in every region, as did contract closings. 86% of homes sold last month sat on the market for less than 30 days. The average was just 17 days. Months’ supply is just 2.4.

It’s tempting to throw up one’s hands and suggest that a combination of demand destruction, higher mortgage rates and increased supply (as builders catch up) will solve various “problems.”

“As mortgage forbearance programs end, and as homebuilders ramp up production – despite the supply chain material issues – we are likely to see more homes on the market as soon as 2022,” Yun suggested on Thursday.

While conceding there’s not much else one can say, falling back on market forces feels unsatisfying.

Implicitly or explicitly, we’ve all lampooned the “transitory” characterization of inflation by now. Indeed, even if you count yourself in “team transitory,” you’ve probably made a “transitory” joke. Apropos, the October vintage of the Philadelphia Fed survey (also out Thursday) showed price indices remained elevated near four-decade highs (figure below).

What’s becoming clearer and clearer by the month is that it’s not just inflation that looks poised to stick around longer than economists expected, but virtually every distortion associated with the pandemic.

And that speaks to why editorializing around the data has become tedious. Every month it’s the same story. And resolution isn’t forthcoming.

As vexing as it is for market participants, it must be even more so for policymakers.


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10 thoughts on “What If Nothing Is ‘Transitory’?

  1. I am reading the same from various directions about coming disinflation. Oh but while the news screams stagflation that may be a ways off.

  2. Total housing units under construction 1.42MM as of Sep 2021 – nearly at the 2008 highs. https://fred.stlouisfed.org/series/UNDCONTSA

    Shift from single-family (SFR) to multifamily (MFD), with MFD units under construction at record highs going back to 1980s (well above late 2000s) and SFR units under construction still below 2008 highs (but rising fast). https://eyeonhousing.org/2021/09/construction-reversal-single-family-multifamily-units-under-construction/

    Housing units continue to keep pace with household formation which is at https://fred.stlouisfed.org/series/TTLHHM156N

    Vacancy rate sizeable and fairly stable (gap between series UNDCONTSA and TTLHHM156N)

    Chart with both series is (hope these links work) https://fred.stlouisfed.org/graph/fredgraph.png?g=I2i5

    Looks to me like the run in house prices is being partly caused by low rates, pandemic shifts in housing preference, general asset price inflation, housing as investment asset dynamic, wealth effects – not by actual shortage of housing units. (Some parallels to China.)

    Less discussed is that institutional investor activity in “rental SFR” asset class has grown to represent 16-25% of transactions in many metros. Scale of institutional capital flow into asset class is such that this buying pressure likely to increase.

    For sale SFR inventory is rising a little in some metros, still declining in others – seasonally it should be generally rising now. Calculated Risk blog tracks this well.

    TLDR: while SFR prices look overbought and primed for correction, fundamental set up looks for continued upward trend in medium term.

    Ways to play this through public equities include builders, SFR REITs, MFD REITs. Not saying we’re at ideal entry points at this moment.

    Just my opinion.

    1. Agree jyl. I would add (and this is probably regionally specific) that building codes have been gradually getting stricter adding to construction costs. I am struggling to pull permits, right now I have two jobs I can’t start, it’s been an uphill climb through red tape. I’ve never had any trouble pulling permits in the past

  3. As someone who makes his living in heavy electrical construction, I hope you are correct. I’ll certainly sleep better if commodities can stabilize and some of the supply chain issues abate next year. As for any macro ramifications to deflation/stagflation, I’m along for the ride with everyone else on that one.

  4. It depends on if they peaked as in the price will come down and supply will return or if simply the price comes down but there isn’t any available anyway so people aren’t bidding up the price because they have given up on getting any. Given the situation in many ports and with industrial supply chains I am familiar with… it seems the latter. Pricing is stabilizing yet you can’t get any anyway even at higher prices… not that the price came down to normal from the highs either.

  5. I think we might have the beginning of the demand destruction at least in commodities. Everything that represents a physical thing was off significantly today. It’s a question of it it’s letting a little air out of the over inflated balloon or the beginning of disinflation. I would not be surprised to see a technical recession amid actual deflationary inflation reads over a short period. Data reads are so skewed right now it provides even less informational value that the usual opacity.

    In other words everything is transitory, 🙂

  6. Existing home sales right now don’t have much to do with what the buyers want (e.g. closing sales before interest rates rise). They have everything to do with how many homes are coming to market. There is simply not much inventory in many markets, particularly at the more affordable end of the market. A simple solution to the situation would be to prohibit any entity from owning more than a certain number of single family homes or condos, e.g five. Small time landlords/investors could still ply their trade, but REITS and corporate entities would be shut out. We as a society care so much for the idea of home ownership that the mortgage interest deduction is one of the most untouchable features of our tax code. Yet we allow corporate interests to make home ownership increasingly difficult.

  7. Given supply constraints, it seems that manufacturers with various models within a given type of product (eg- refrigerators), put all of their manufacturing focus on the higher margin, more expensive products.
    This resulted in fewer low margin, cheaper products being manufactured.
    It seems that this scenario occurred across many types of products and autos, especially within “durables” categories resulting in higher CPI numbers.
    This will resolve as we get back to normal. I don’t want “fully loaded” anything (which is all I can find right now)- so I am just waiting.

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