The Line: The Latest on Housing and GDP in the Second Quarter
Updated: Aug 17, 2021
Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
Economic Growth Much Lower Than Expected in the Second Quarter
Gross domestic product—which measures the value of all goods and services produced in the U.S.—grew at a 6.5% annual rate in the second quarter. While this is a very strong number, it was much lower than the 8.4% pace economists were looking for.
Why the big miss, Greg?
A few reasons. I’ve spoken at length about the shortage of labor in the U.S., which has prevented many businesses from operating at maximum levels. Supply-chain disruptions have also been a drag on growth, with many commodities becoming harder to get. We’ve seen what the shortage of lumber has done to housing construction.
Then there’s inflation, which has been running at levels not seen in decades. If the price of goods and services rises sharply, you must expect consumers to buy less of them. Remember: Consumer spending accounts for 70% of GDP.
So, any good news?
Absolutely. GDP has now surpassed pre-pandemic levels, and in far less time than most thought. Also, corporate profits over the past few years were revised up sharply.
The bottom line is: While a bit disappointing, economic growth in the second quarter was still very strong. How many thought that in less than 18 months GDP would be back above its pre-COVID-19 level? I know the recent increase in virus cases has many worried, but for now we can enjoy this good news.
What’s Up with Housing?
Earlier this week, CNBC posted the following headline:
“Housing boom is over as new home sales fall to pandemic low.”
That was followed a few days later with this:
“Pending home sales drop in June—more evidence of a housing turnaround.”
While these headlines sound scary, things are not that bad. Sales of both existing and new homes have come down from their unsustainable paces for sure, but not because of a lack of demand. Housing’s real problem remains a shortage of inventory.
This has driven up prices and kept many buyers on the sidelines. According to the S&P 500 Case-Shiller Index, home prices in May were 17% higher than the year before, the largest annual increase in the report’s history.
But this is starting to change. In June, existing home sales ticked up, as more listings hit the market. While there’s still just a 2.6-month supply of existing homes for sale, at least inventory is starting to move in the right direction.
The supply of new homes has also been climbing, reaching 6.3 months last month. New-home supply has been constrained by an unprecedented spike in lumber prices, which has finally started to turn around.
While the media always seems to portray housing as a boom or bust scenario, what we’re seeing now is a market adjusting to an out-of-whack supply-and-demand relationship. With job growth expected to remain strong in the coming months, the demand will be there. More supply, and the fact that 30-year mortgage rates are now below 3%, will help affordability.
So just relax and enjoy the weekend.