Pro Perspectives 5/21/20

May 21, 2020

We’ve been talking about this building theme of higher prices — driven by the mismatch between demand, which is being turned back on like a light switch, and supply, which has been disrupted and will take time to rebuild. 
The demand light switch:  Stay-at-home orders are lifting, businesses are opening, people are getting back to work, and they are doing so with a 45-year high savings rate.  So, not only is their pent-up demand, they have money — the latest data shows a spike of savings up to 13% of disposable income – a near double from the beginning of the year. 

Meanwhile, the supply of goods and services has been disrupted, if not completely shut down, in some cases.  So we have a situation where money will be chasing fewer goods and services.  That tends to lead to higher prices. 

With this in mind, recessions have historically brought about housing price downturns.  I suspect not this time. 

Remember, the intent of policymakers (here and globally) to combat the global economic shutdown by flooding the world with money, was to ultimately inflate economies and deflate debt.

This was an explicit devaluation of cash against asset prices.  And as we’ve discussed, these policy moves will reset the price of everything (consumer stables, consumer products, services, labor … and also stocks, real estate, commodities … everything). 

So as people have been expecting housing prices to fall.   The early indicators are signaling the opposite. 

On the supply side, Redfin says the supply of homes was down 24% in April.  In addition, the recent new housing starts data showed a sharp plunge, as you can see in the chart below …

New listings on Redfin were down 42% in April …
What about demand?  Houses sold six days faster in April, compared to a year earlier.  And 27% sold above listing price.  And only one market of the 85 largest metra areas had a year-over-year decline in median sale prices.  

Again, we’ve seen early signals of the supply/demand mismatch in food prices.  Now we’re seeing evidence in real estate.  As economies reopen, expect more to come.