Housing market strong, but home prices high relative to income

 The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment in November unexpectedly improved to another record high, jumping to 90, versus forecasts calling for it to match October's 85 level. A level north of 50 depicts positive conditions. The index notched a record high for the third month in a row and the NAHB noted that this reflects that housing is a bright spot for the economy. "However, affordability remains an ongoing concern, as construction costs continue to rise and interest rates are expected to move higher as more positive news emerges on the coronavirus vaccine front," the NAHB added.

Housing starts for October rose 4.9% month-over-month (m/m) to an annual pace of 1,530,000 units, above the Bloomberg forecast of 1,460,000 units, and compared to September's upwardly-revised pace of 1,459,000 units. However, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, came in flat m/m at an annual rate of 1,545,000, south of expectations of 1,567,000 units.

The MBA Mortgage Application Index dipped by 0.3% last week, following the prior week's 0.5% decline. The modest decline came as a 1.8% drop in the Refinance Index more than offset a 3.5% gain in the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 2.99%.

Millennials’ homeownership rate trend — which has largely lagged prior generations — has started to reverse with the rate jumping in 2020. Demand from millennials should remain strong for years. Another possible driver for young buyers could come from housing policy. Biden has proposed a $15,000 tax credit for first-time homebuyers, which could lead to even greater housing demand. Waning stimulus and government housing programs, high unemployment among the young, and falling affordability (chart below) are risks for Homebuilders.