Record 29% of for-sale homes not under construction yet: RPT

Gregory Daco, Oxford Economics Chief U.S. Economist, joins Yahoo Finance the discuss Oxford Economics’ latest housing report and outlook on the housing market.

Video transcript

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ALEXIS CHRISTOFOROUS: Is the Delta variant hurting the economy? It depends on who you ask. There are a handful of businesses over the past several weeks that have said customers are closing their purses. We had consumer confidence fall through the floor. Retail sales sank last month. But on the other end, we've got an electric job market right now and new home sales bouncing back in July.

Here to break it down for us is Greg Daco. He is Oxford Economics Chief US Economist. Greg, always good to see you. So look, the economy is putting out a lot of mixed signals here right now. What do you make of it?

GREGORY DACO: Well, I think we're in an environment where there is some degree of uncertainty. We are probably near peak growth and peak inflation, as you mentioned in the outset, because we're likely to see an environment in which economic momentum cools over the last part of the year and into 2022 but still remains fairly strong from an objective perspective. Likewise, inflation is likely to come off of its top above 5% for the CPI reading but still remain fairly warm over the latter part of this year and into next year.

There are different currents happening at the same time. I think the health situation has deteriorated. That is weighing on people's optimism, as you mentioned, in terms of consumer sentiment, but there may be a lot of emotion in there and a little bit less reason, because the health situation is clearly not terrible. It's worsened, but there is some hope that perhaps we've actually reached the peak of this new wave yet again and that the end of the year may be more optimistic.

ALEXIS CHRISTOFOROUS: Greg, what do you see as sort of the pillars of the economic recovery? For a long time, housing was one of those pillars. And we've seen cracks there over the past few months. We saw a modest bounce back in new home sales last month. But what's your take on the overall housing industry right now?

GREGORY DACO: I think first and foremost, the main pillar is, and will remain, the health situation. We have to have a stable and solid health situation to ensure a solid recovery. So that's number one. In terms of the housing sector, we had a very hot housing market because of housing conditions that were quite favorable and people wanting to either buy new homes in new places that were perhaps less densely populated or look for secondary homes. After this surge in demand, what we had was an environment in which inventories fell to record lows and prices surged.

What we're seeing in the most recent data is there's actually some signs that there is a build up in new homes, a build up of inventory, but a lot of that inventory that is rebounding is actually not essentially built. If you look at the latest data for new home sales, 29% of the homes that are for sale have not been built. 34% of the homes that were sold in July have not been built. So there is a strong pipeline for construction, but we still have to keep in mind that there are still supply constraints, both on the input front from a capital perspective and on the input front from a labor perspective that are straining housing activity.

ALEXIS CHRISTOFOROUS: And which can also put a strain on overall prices, which means higher inflation. You mentioned earlier that you believe we're past peak inflation right now. So where do you see prices going as we head toward 2022? Are we going to see a drop in prices? Or are they going to plateau? What are you thinking?

GREGORY DACO: Well, I think we're going to see somewhat of a plateau in the next couple of months and then a gradual decline in inflation rates and a rotation in the mix of inflation. That's very important to understand from an economic perspective. What we're seeing is really a rotation in the nature of growth. Whereas the good side was really driving growth earlier in the recovery, the service sector is driving more growth as of right now.

And we're going to continue to see that rotation where housing and housing inflation is going to play a greater role in both supporting economic activity, but also supporting inflation rates. So as we look at the Fed's main gauge for inflation, the core PCE indicator, we're likely to see core PCE inflation hover above or around 3% for the foreseeable future and then gradually fall towards 2% but remain above the Fed's target, which is something that I think the Fed is willing to tolerate, given its new flexible average inflation targeting framework.

ALEXIS CHRISTOFOROUS: Mm-hmm. Speaking of the Fed, we've got the Jackson Hole symposium kicking off tomorrow. What are you expecting to come from that symposium? And what's your timeline for bond tapering and interest rate hikes?

GREGORY DACO: I think it'll be very interesting to see how Powell reacts to the latest developments, both in terms of how inflation has developed, how the health conditions have developed, and how the labor market has developed. Because we have to keep in mind that although the minutes from the previous FOMC meeting noted that if economic conditions remain the same they would consider tapering asset purchases by the end of this year, things have not necessarily evolved in the way they would have expected them to.

So Powell may have somewhat of a more dovish lean in terms of his remarks because of the environment and because of how health conditions have somewhat deteriorated and how that's weighing on actual economic data. Remember, the Fed is focused on actual outcomes, not forecasted outcomes. And so it may be that Powell has a bit more of a dovish lean given those developments in terms of health and economic data.

ALEXIS CHRISTOFOROUS: All right. Greg Daco of Oxford Economics, thanks so much for being with us. We're going to bring you--

GREGORY DACO: Thank you.

ALEXIS CHRISTOFOROUS: --highlights from that Jackson Hole symposium live here on "Yahoo Finance Live" later in the week.