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New Home-Purchases in US Enters Growth Mode

May 27, 2020 By Mircea Vasiu

If the world is learning something from the current economic crisis, it is that not everything is on a declining trend. Online shopping increased dramatically – and so did the demand for housing. 

The first thing that comes to mind in an economic crisis is that people will have a hard time spending on durable goods or other goods of higher value – like a house. Yet this crisis so far is unique in every way, and the consumers’ response differs from any other regular economic crisis.

Rising Pent-Up Demand for US Housing

The US New Home Sales data from yesterday blew all expectations. New Home Sales for the month of April rose to 623K on expectations of 480K. Put it simply, on an MoM basis, the New Home Sales rose by 0.6% in April on an expectation of a drop of -23.4%. What made such a big difference? Is the data distorted or the forecast was simply wrong?

According to the Homebuying Demand Index compiled by Redfin, housing moved from recovery into growth mode. For the seven days ending May 17, demand was almost 17% higher on a seasonally adjusted basis. Therefore, not only was the April data not incorrect, but May will most likely show further strength in the sector.

Several factors are responsible for the rising demand for housing. To start with, the historically low interest rate makes it one of the cheapest times in history to take a mortgage. Coupled with the perspective of a prolonged period of low interest rates, the signal sent to households is that this is one of the best times in history to buy a house.

Another thing to consider is the challenges posed by the coronavirus health crisis. Throughout the world, the most affected areas were the ones with high population density. Big metropolitan areas suffered the most from the pandemic.

As such, the migration from the big metropolitan areas is picking up steam as people are putting family priorities first. People’s way of working has begun to change, with many now working from home, and so a new lifestyle begins – out of the major metropolitan areas.

The lesson here is that the world moves on. Economic concepts may change, monetary policy may engage in more unconventional measures – but in the end, trends change, and so does the world. What’s hot for several decades may become obsolete overnight, and a new trend arises.

The housing demand is an encouraging sign for economies struggling to fight the pandemic. It reveals how to put to work the easy financing conditions set up by governments and monetary authorities, for the good of the real economy.

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