Home Sales Moderate as Pandemic Tailwinds Ease
The housing data headlined this week’s light schedule of major economic reports. Sales of both new and existing homes fell in May. Both declines were in line with expectations, which had been tempered by earlier declines in mortgage applications and pending home sales. May’s drop in new home sales was accompanied by downward revisions to sales for each of the prior three months. Even with the pullback, sales are exceptionally strong, with existing home sales falling to a 5.8 million-unit annual pace and new home sales moderating to a 769,000-unit pace. Home prices did not moderate, however, with the median price of an existing single-family home surging a record 24.4% over the past year and the median price of a new home spiking 18.1%.
While buyer traffic has clearly eased, as evidenced by last week’s report from the National Association of Home Builders, we suspect demand has not cooled off all that much. Home builders are still selling homes faster than they can build them, and most have lengthy backlogs. Buyer traffic has clearly slowed, however, particularly in many of what have been the nation’s hottest housing markets. The culprit is likely some combination of the astonishing rise in home prices over the past year, which has curbed affordability, as well as some lessening of the tailwind from buyers seeking trendy locations for remote working. Another factor restraining buyer traffic is that there are not that many homes for home buyers to look through. The number of completed homes available for sale remains near an all-time low, and inventories of existing homes also remain extraordinarily low, with homes typically selling in two weeks or fewer.
The U.S. Has Led the Recovery, but the Rest of the World Is Starting to Catch Up
Recent data have offered the clearest signs yet that a more meaningful Eurozone economic upturn is underway. The Eurozone June manufacturing PMI held steady at 63.1 (see chart). Although there was no improvement in the manufacturing index over the month, its abiity to hold steady at May’s all-time high signals that the factory sector is booming in Europe like it is in much of the rest of the world. Perhaps even more important, however, the services PMI rose to 58.0, the highest level since January 2018. The services PMI dipped below the key 50 level in September 2020 and remained in contraction territory until April 2021, when it hit 50.5. May and June have shown much stronger readings and suggest that the service sector is seeing a broader recovery as COVID cases fall, vaccinations rise and government restrictions melt away. We released our latest monthly International Economic Outlook yesterday, and it included an upward revision to our forecast for the Eurozone economy. We now forecast Eurozone GDP to grow 4.3% in 2021 (compared to 3.9% previously), while our GDP growth forecast of 4.2% for 2022 is unchanged.