Monday witnessed existing home sales data that may be suggesting a bottom according to realtors, and sales of newly built homes climbed far more than projected, close to 13% annually, according to the U.S. Census. But this might pose an issue for homebuilders say financial experts.
After dropping sharply in March as a result of the Covid-19 pandemic, they posted the healthiest May pace since 2007, a recovery that shocked even the builders themselves. But housing starts were weaker, and builders are scrambling to meet this new demand.
“Sales of homes not yet under construction are rising given capacity limitations in the building industry,” said Robert Dietz, chief economist at the National Association of Home Builders. “Due to labor and land constraints, homebuilders were already producing too few single-family homes given potential demand. As housing demand has picked up in recent weeks, builders have shifted sales to homes not yet under construction – a 20% year-over-year gain for such sales.”
Homebuilders are adding staff in an effort to meet the elevated demand, Dietz noted, adding 226,000 workers in May. Yet, they were already working hard to find skilled workers before the pandemic hit. Land and material are also more expensive now. Lumber prices, in particular, recently spiked, after falling sharply at the start of 2020.
While sales of newly built, single-family homes were nearly 13% higher annually, single-family housing starts in May were on the other end of the spectrum, an almost 18% lower for the year, while building permits, an prognosticator of future construction, were off by nearly 10%.
In short, builders did not see demand recovering so fast. The stay-at-home orders may states have heightened already increasing demand for suburban homes, and buyers are now looking for new homes rather than existing homes.
“The rapid improvement in sales of new homes may also reflect a change in consumer preferences, with buyers showing a newfound penchant for cleaner, never-lived-in homes — although the long-term durability of that trend remains to be seen,” said Matthew Speakman, an economist at Zillow.
For ETF investors, this could mean looking at homebuilder funds like the iShares U.S. Home Construction ETF (ITB), the SPDR S&P Homebuilders ETF (XHB), or the Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL).
There is still a concern, however, whether the demand will persist, given the many challenges that continue to affect the economy from the still-spiking pandemic.
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