In a Nutshell: A Very Tight & Expensive Housing Environment

By Ken Herman

"Overall, we remain in a 'Goldilocks' environment with an accommodative Fed (despite a strong economy) that is creating significant demand-push inflation."

Housing statistics confirm that houses available to purchase are extremely limited, so the volume of sales continues declining.  While rapidly rising prices of lumber and other components may have impacted the reduced number of housing starts, there appears to be plenty of ongoing demand, and supply obviously lags demand.  So, why aren’t more houses getting built?

The Commerce Department reported that housing starts in the U.S. declined 9.5% in April to an annual pace of 1.569 million, down from a revised annual pace of 1.733 million in March.  Single family home starts declined even more, down 13.4% in April to an annual pace of 1.087 million.  The rising cost of copper, lumber, and steel are part of the problem.  However, an acute labor shortage, as well as key component shortages may be negatively impacting housing starts more than cost increases.

However, building permits rose 0.9% in April to an annual pace of 1.76 million, so housing starts should improve in the upcoming months, assuming the needed labor and materials to build more new houses becomes available.  Compared to a year ago building permits have risen 60.9% despite the “demand push” extreme inflation that is now impacting the housing market.

The National Association of Realtors announced that existing home sales declined 2.7% in April to an annual pace of 5.85 million. This represents the third straight monthly decline in existing home sales, obviously due to the lack of homes for sale.  According to the National Association of Realtors’ chief economist, Lawrence Yun, “For every listing, there are 5.1 offers.  Half the homes are being sold above the list price”.

The recent supply of existing homes for sale declined another 20% to 1.16 million, which represents an ultra-tight 2.4-month supply. One result is that in the past 12 months the median home price has increased a whopping 19.1% to $341,600.  This represents the strongest annual housing cost appreciation ever recorded (at least since the data began in 1999).

The CoreLogic Case-Shiller Home Price Index announced last Tuesday that home appreciation is now running at the fastest pace in more than 15 years.  Specifically the average home prices in 20 major metropolitan areas rose at a 13.3% annual pace through March, up from a 12% annual pace in February. Phoenix had the fastest rate of housing price increases, at 20%, followed by San Diego at 19.1%.

Overall, we remain in a “Goldilocks” environment with an accommodative Fed (despite a strong economy) that is creating significant demand-push inflation.  Various port bottlenecks and supply shortages are also expected to continue. China recently had to close one of its major container ship ports in Shenzhen due to a Covid-19 outbreak.  Lockdowns are also underway in Malaysia and Melbourne, Australia, reminding us that Covid-19 has not gone away.  Despite excess vaccines in America, COVID-19 vaccines have not been readily available in all countries.

The month of May has historically been flat for stocks, and this May was no exception. The S&P 500 rose just 0.47% this May. Although the Dow rose 1.93%, NASDAQ fell -1.53%, so May remained a “wash”.  Over the last 20 years, June has been worse. June is tied with September as the worst month (-0.71%) in the Dow, declining in 12 of the last 20 years.  During the last century June has been mediocre at best (+0.41%).

Looking forward to the summer months the recent historical record doesn’t look much better. The five-month period from May to September looks especially dismal over the last 20 years, averaging -0.3%.  This backs up the old saying, “Sell in May and Go Away”.  However, trading by calendar sayings – or any other form of market timing – can be a loser’s game.  If you want to apply historical trends, try thinking in terms of “be more selective in summer” or “stop watching prices every day and take a vacation”. 

Interestingly June was positive in the last five years, and “Sell in May” was a losing proposition, especially last year, when the gains from May 1 through October 31 exceeded 24%.  Obviously COVID spring lock-downs impacted gains last summer.  Part of the problem with historical “rules” is that the past is truly no guarantee of the future!  If you toss “heads” 10 times in a row, the chances of tossing either heads or tails the next time is still 50%.

While June was flat or negative 12 of 15 times from 2001 to 2015, that was no help in predicting the market during the next five Junes, which were ALL positive in the S&P 500.  My advice, forget historical patterns.