Implications: New home sales soared in July, posting a third consecutive monthly gain, easily beating consensus expectations, and hitting the fastest pace since 2006. As we wrote in yesterday's Monday Morning Outlook, it looks like the housing revival is well underway. Remarkably, new home sales are now 16.4% higher than the January high before COVID-19 hit the US economy. A couple of factors should continue to keep new home sales strong in the months ahead. First, affordability; near zero interest rates from the Federal Reserve have helped reduce 30-year fixed mortgage rates below 3% for the first time on record. Second, due to the pandemic and urban unrest, buyers' preferences look to be shifting away from units in denser urban environments, toward the more spacious options in the suburbs where most new single-family homes are built. Finally, there is still pent up demand from potential buyers whose purchases were temporarily disrupted by lockdowns and widespread economic uncertainty in the wake of the pandemic. However, a lack of finished new homes waiting for buyers could be a headwind for sales going forward. In the past year, the only portion of the inventory of unsold new homes that has increased are homes where construction has yet to start. Meanwhile, the inventory of unsold homes that are either under construction or finished is still down from a year ago. Given the downward pressure that social distancing regulations, shortages of labor, and supply chain issues continue to exert on new construction, we do not expect an oversupply of homes anytime soon. This is reflected in the months' supply (how long it would take to sell today's inventory at the current sales pace) of new homes for sale, which fell to 4.0 in July from 4.6 in June, tying the lowest level since 2004. As a result, home prices should continue to rebound in the next several months. For example, the national Case-Shiller home price index rose 0.2% in June and is up 4.3% from a year ago, an acceleration from the 3.2% gain in the year ending in June 2019. In the past twelve months, prices were up the most in Phoenix and up the least in Chicago. Meanwhile, the FHFA index, which measures prices for homes financed by conforming mortgages, rose 0.9% in June and is up 5.7% from a year ago, an acceleration from the gain of 5.0% in the twelve months ending in June 2019. Finally, on the manufacturing front, the Richmond Fed index rose to +18 in August from +10 in July, the highest reading since late 2018, signaling continued improvement in the factory sector.
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