Homebuying Demand Remains Robust, though Supply and Labor Constraints Continue to Hinder Production

Key Takeaways:

• Housing starts declined 1.6 percent to a seasonally adjusted annualized rate (SAAR) of 1.6 million units in September, according to the Census Bureau. The drop was due entirely to a 5.0 percent decline in multifamily starts, bringing the level to a SAAR of 475,000, as single-family starts were flat at a SAAR of 1.1 million. Single-family permits declined 0.9 percent to a SAAR of 1.0 million, while multifamily permits fell 18.3 percent to a SAAR of 548,000, the largest percentage decline since July 2015.
• Existing home sales jumped 7.0 percent to a SAAR of 6.3 million in September, the highest level since January, according to the National Association of REALTORS®. Compared to a year ago, existing sales were down 2.3 percent. On an annual basis, the number of existing homes on the market fell 13.0 percent, the 28th consecutive month of year-over-year declines. The months’ supply declined two-tenths to 2.4. The median sales price increased 13.8 percent from a year ago, the slowest annual growth rate since December 2020.
• The National Association of Home Builders/Wells Fargo Housing Market Index rose 4 points to 80 in October.  A reading above 50 indicates that more builders view the single-family market as “good” rather than “poor.” The index for single-family sales in the present moved up 5 points to 87, while the index for single-family sales in the next six months increased 3 points to 84. Traffic of prospective buyers increased 4 points to 65, the highest level since July. The press release cited “strong consumer demand” as causing the uptick in builder confidence but warned of “growing affordability challenges stemming from rising material prices and shortages.”
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, fell 1.3 percent in September, and August’s number was revised downward five-tenths to a 0.1 percent decline, according to the Federal Reserve Board. Manufacturing output was down 0.7 percent, the largest decline since February, partially driven by a 7.2 percent drop in motor vehicle and parts manufacturing. Mining output fell 2.3 percent, likely due in part to lingering oil rig shutdowns in the Gulf Coast resulting from Hurricane Ida. Utilities output was down 3.5 percent as weather moderated to more seasonal norms, lowering cooling demand. Capacity utilization for manufacturing declined 0.6 percentage points to 75.9 percent.

Forecast Impact:

The robust existing home sales number was somewhat above our upwardly revised expectation for Q3. Demand for housing has remained strong despite the lack of homes available for sale and high prices, though we continue to expect sales to moderate in Q4 and into 2022. We believe the low inventory of available existing homes will continue to be the primary constraint on sales next year, though we still expect the level of sales to remain roughly 6 percent higher than 2019 levels. Demand for new homes also remains strong, reflected both in the single-family starts number, which appears to be leveling out at a pace roughly 10 percent higher than what occurred before the COVID-19 pandemic, and the increase in homebuilder sentiment. However, homebuilders still face supply chain bottlenecks and labor scarcity. The total number of homes under construction continued to move up, rising 1.1 percent over the month to a level 30.6 percent higher than a year ago, reflecting a comparatively slower pace of completions in recent months relative to starts. While the recent drift upward in mortgage rates may begin to cool new and existing home sales somewhat, we continue to see demand as being sufficiently strong to drive a faster pace of home construction if homebuilders are able to sufficiently alleviate supply constraints.

The disappointing decline in industrial production is tempered somewhat by a handful of temporary factors that we expect to alleviate next month. We believe mining output should recover in October as nearly all production capacity has returned to the Gulf Coast following Hurricane Ida, and utilities output should stabilize as the weather returns to seasonal norms. Even with these caveats, however, production continues to be hampered by supply chain bottlenecks and a tight labor market, which we believe will continue to drive inflationary pressures and weigh on growth well into 2022. Considering both the unusual declines in utilities and mining output and other indicators and reports that suggest auto manufacturing is likely already at or near its trough, our growth outlook is unlikely to change based on the industrial production report.

Nathaniel Drake
Economic and Strategic Research Group
October 22, 2021

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.