Dynamics Between Household Formation, Home Sales And Prices, And Consumer Inflation

Household formation has picked up speed, as have sales of homes, putting downward pressure on the supply of homes and upward pressure on prices. Prices are appreciating seven-eight times the rate of consumer inflation, hence not sustainable.

US households are growing nicely, ending March at 126 million, up from 125 million in March last year. Last August’s 127.3 million was a record, with formation just under 126 million for four months.

On a 12-month running average basis, households hit a new high of 126.3 million in March, up 2.9 million from March last year. The momentum in household formation can be seen by comparing it to population growth. The ratio between the two jumped to 0.386 last June, before retreating slightly; since last September, it has gone sideways at 0.38 (Chart 1).

Housing starts, in contrast, are struggling to keep up. In March, they grew 19.4 percent month-over-month to a seasonally adjusted annual rate of 1.74 million units. Last April, post-pandemic, they dropped as low as 934,000 units.

In recent months, builders are showing aggression in breaking new ground. In March, the 12-month running average stood at 1.43 million, up from 1.37 million a year ago.

Builders are beginning to get their act together as sales have picked up momentum.

In March, new home sales jumped 20.7 percent m/m to 1.02 million (SAAR), which was the highest since August 2006, while sales of existing homes dropped 3.7 percent m/m to 6.01 million. Last October, existing home sales rose as high as 6.73 million.

The momentum in sales is better seen in Chart 2, which uses a 12-month rolling average. Sales turned sharply upward last July. On this basis in March, new homes were 890,000 and existing homes 5.86 million – the highest since July 2007 and June that year, in that order.

A lack of starts and a pickup in sales have combined to shrink the availability of homes to a bare minimum.

In March, the supply of existing and new homes respectively stood at 2.1 months and 3.2 months – not too far away from their respective record lows (Chart 3). At the peak in 2009-2010, supply soared to low- to mid-double digits. Even in the early months last year, as the economy shut down and sales took a hit, supply rose to 4.6 months and 6.1 months in May and April respectively. In the subsequent months, the metric persistently came under pressure.

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