Early signs that exodus from cities is easing - Capital Economics
US Housing

Early signs that exodus from cities is easing

US Housing Market Update
Written by Matthew Pointon
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An important driver of the surge in home sales over recent months has been households leaving apartments in cities to escape COVID-19 and acquire more space to work from home. But a fall in the share of single-family and completed new homes in total home sales, and a shrinking gap between city and national house prices, imply that source of demand is declining. Alongside record low inventory, that’s another reason to think home sales next year will fall back from their current elevated level.

  • An important driver of the surge in home sales over recent months has been households leaving apartments in cities to escape COVID-19 and acquire more space to work from home. But a fall in the share of single-family and completed new homes in total home sales, and a shrinking gap between city and national house prices, imply that source of demand is declining. Alongside record low inventory, that’s another reason to think home sales next year will fall back from their current elevated level.
  • One factor driving the recent surge in home sales has been an exodus from cities, as Americans sought to escape COVID-19 and find larger spaces to work from home. We always expected that shift to be short-lived. Particularly as part of the move reflected a bulge of households in their late-20s bringing forward a planned move to the suburbs. (See Focus.) And there is early evidence that the move away from cities is already starting to ease.
  • It will be some time before we get data on internal migration over the past few months. But some of the timelier indicators that showed a move away from cities are now returning to their pre-COIVD level. For example, the share of single-family homes in total existing home sales surged to a record high 91.3% in May, as households left apartments in cities for homes in the suburbs. But the share has since dropped back to a more ‘normal’ 89.3%. (See Chart 1.) Similarly, the share of completed homes in new home sales also jumped, to 29% in July, as a half-built home was no use to those looking to move immediately. But that share had fallen back to 23% by October. (See Chart 1 again.)
  • Admittedly, the return to more usual levels on both metrics will in part reflect inventory constraints. The number of completed new homes for sale and single-family existing homes have both seen a relatively large decline. But the latest house price data also implies that demand for homes in cities relative to other areas is starting to ease. After spiking to 1.5% points in June, the difference in annual growth between the national and 10-City Case-Shiller indices has since resumed its downward trend. (See Chart 2.)
  • Looking ahead, the direct impact of COVID-19 on home sales will continue to decline, particularly given the arrival of vaccines next year. Therefore, home sales will increasingly be influenced by more ‘normal’ drivers, for example mortgage interest rates, credit conditions and the overall health of the economy.
  • Mortgage interest rates will remain low, and the economy should see a decent recovery on the back of vaccines and potential further fiscal stimulus. But without the added direct boost to demand from COVID-19, we expect home sales will fall back from their current elevated levels, with total sales ending 2021 down around 10% to 15% compared to the end of 2020.

Chart 1: Existing Single-Family & Completed New Home Sales (% Sales)

Chart 2: Gap Between National & 10-City Annual House Price Growth (% Points)

Sources: NAR, Census Bureau, Capital Economics

Sources: Case-Shiller, Capital Economics


Matthew Pointon, Property Economist, matthew.pointon@capitaleconomics.com