The surge in home sales looks to be running out of steam. The pending home sales index dropped back in September and October, and that points to a fall in existing home sales in November. With pent-up demand from the spring now largely expended, mortgage interest rates unlikely to fall further, inventory at record lows and early signs that the exodus from cities is slowing, home sales will edge back further over 2021. That, alongside tight credit conditions, suggest the current boom in house prices will prove short-lived. Rental demand is showing signs of recovery, and yields dropped back in the third quarter. After a sharp slowdown to -1.3% y/y in the third quarter, rental growth should gradually recover to around 1% y/y by the end of next year.
- The surge in home sales looks to be running out of steam. The pending home sales index dropped back in September and October, and that points to a fall in existing home sales in November. (See Chart 1.) With pent-up demand from the spring now largely expended, mortgage interest rates unlikely to fall further, inventory at record lows and early signs that the exodus from cities is slowing, home sales will edge back further over 2021. That, alongside tight credit conditions, suggest the current boom in house prices will prove short-lived. Rental demand is showing signs of recovery, and yields dropped back in the third quarter. After a sharp slowdown to -1.3% y/y in the third quarter, rental growth should gradually recover to around 1% y/y by the end of next year.
- Economic indicators: A rebound in COVID-19 infections has slowed the labour market recovery, and we have revised down our forecasts for growth in the final quarter of 2020 and first quarter of 2021. But the arrival of vaccines next year means growth is now set to be stronger over the second half of next year.
- Single-family: A combination of surging home sales and record low inventory have combined to create a mini house price boom, with prices up 9.1% y/y in September. But home sales are now levelling off, and early signs that the exodus from cities is declining means price growth will fall back next year.
- Multifamily: Rental growth has seen a sharp downturn, driven by falls in large cities. But there are signs that rental demand is starting to recover from COVID-19. Against expectations apartment yields ticked down in the third quarter, and we now think capital values will see only a small fall this year, before recovering in 2021.
Chart 1: Existing Single-Family & Pending Home Sales
- A renewed surge in COVID-19 infections has prompted several states to re-impose restrictions (2). The modest fall in the ISM services index to 55.9 in November, from 56.6, implied that the surge in cases had had a limited impact on the economy so far (3). But other evidence is more equivocal, notably the slowdown in the pace of non-farm payroll gains to 245,000 in the same month (4).
- The unemployment rate edged down to 6.7% in November from 6.9% a month before, but that in part reflected a big decline in the labour force. The prime-age employment to population ratio also implies that labour market conditions have tightened by less than the headline unemployment rate suggests (5.) The unexpected drop in core inflation to 1.6% in October, from 1.7% in September, also looks to reflect continued subdued demand in the services sector (6).
- We now think economic growth will be slower than we previously assumed in the fourth quarter and the first quarter of next year. However, as the associated restrictions on activity are eased early next year, and effective vaccines are rolled out, we expect GDP growth to recover quicker than we previously expected over the rest of 2021 (7).
Chart 2: COVID-19 Infections & Deaths
Chart 3: ISM Activity Surveys (Index)
Chart 4: Non-Farm Payroll Employment (Millions)
Chart 5: Unemp. & Prime-Age Emp.-to-Pop. Ratio (%)
Chart 6: CPI Inflation (% y/y)
Chart 7: Real GDP
Sources: Refinitiv, C.E.
- The 30-year mortgage rate fell to another record low of 2.90% in the first week of December (8). But with the 10-year Treasury yield now rising, we doubt mortgage rates will fall further. The drop in mortgage rates didn’t boost home demand in November, and home purchase demand has been broadly flat since June. The spike in applications toward the end of the month looks to reflect seasonal-adjustment issues (9).
- There are signs that the cooling in demand is now feeding through to home sales. Admittedly, existing home sales increased again in October, rising to a 15-year high. But the pending home sale index has dropped back over the last two months pointing to a dip in sales in November (10). Meanwhile, new home sales have been flat since July, although they were still up 40% y/y in October (11).
- One of the causes of the recent surge in home sales has been households leaving apartments in cities for homes in the suburbs, in search of more space to work from home. The share of SF homes in total existing home sales climbed to a new high of 91.3% in May. But it has since fallen back to its pre-virus level (12). The latest house price data also implies that the move away from cities is losing momentum as the gap between national and city house price growth has started to shrink (13). (See Update.)
Chart 8: 10-Yr Treasury Yield & 30-Yr Mtge Rate (%)
Chart 9: Mortgage Applications (Index)
Chart 10: Existing SF & Pending Home Sales
Chart 11: New Home Sales (000s Ann.)
Chart 12: Exist. SF & Comp. New Home Sales (% Sales)
Chart 13: Nat. & City House Price Growth (Diff. % Pts)
Sources: Refinitiv, MBA, NAR, C. Bureau, Case-Shiller, C.E.
Single-Family Market (Continued)
- Future home sales will be constrained by a lack of supply, with the number of existing homes for sale falling to record lows in October (14). But a lack of inventory and rising prices will provide homebuilders with a strong incentive to increase production. Indeed, the NAHB measure of homebuilder confidence climbed to 90 in November, hitting another record high (15).
- In line with rising homebuilder confidence, SF housing starts rose by 6.4% m/m in October, the sixth consecutive month of gains (16). This left SF housing starts 75% above their trough in April. The 0.6% m/m rise in SF building permits points to further gains in starts in November (17). But with lots in short supply, starts will grow at a slower rate. We expect SF starts to end the year at around 1.19m annualised.
- Strong home demand, combined with record low inventory, have caused house prices to surge. September’s annual growth rate picked up to 7.0% on the Case-Shiller index and 9.1% on the FHFA index, the highest rate in almost 15 years (18). While this is a substantial rise, the boom is likely to be short-lived. After all, despite picking-up, house price expectations do not support a self-reinforcing bubble (19). We expect house price growth to slow to 2.0% y/y by the end of 2021.
Chart 14: Existing Homes for Sale (000s, S.Adj.)
Chart 15: NAHB Homebuilder Conf. & Mths Supply
Chart 16: NAHB Homebuilder Conf. & SF Starts
Chart 17: SF Starts & Building Permits (000s Ann.)
Chart 18: House Prices (% y/y)
Chart 19: House Price Expectations Next 12-Mths (%)
Sources: Refinitiv, C. Bureau, C-Shiller, FHFA, MBA, NAHB
- There are early signs that rental markets are recovering from the impact of COVID-19. While respondents to the NMHC survey still reported a loosening in apartment markets in the fourth quarter, the balance did improve (20). And, according to the Census Bureau, the three-month absorption rate recovered from 44% in the second quarter to 57% in the third (21).
- Therefore, while we still think apartment vacancy rates have further to rise from the 5.0% REIS reported in the third quarter, we expect the national rate will peak at a relatively low 5.5% by the end of the year (22). Rental markets outside the major cities have performed relatively well, which probably reflects some households leaving cities to rent larger, more affordable units elsewhere. Indeed, apartment vacancy rates in areas outside large cities, such as Central New Jersey, have not seen any increase (23).
- One factor keeping a lid on vacancy rates has been a collapse in apartment completions (24). Looking ahead, a swift recovery in the NAHB MF production index argues against a sharp fall in starts over the final quarter of the year (25). But, given the large number of units already in the pipeline, MF starts are likely to edge down toward 300,000 annualised over the next few months.
Chart 20: Measures of Rental Market Tightness
Chart 21: SOMA Absorption Rate (%)
Chart 22: Apartment Rental Vacancy Rates (%)
Chart 23: Selected Apartment Vacancy Rates by City (%)
Chart 24: REIS Apt. Completions (000s Ann.)
Chart 25: NAHB Production Index & MF Starts
Sources: Refinitiv, REIS, C. Bureau, NAHB, NMHC
Multifamily Market (Continued)
- As government support for incomes has expired, there are signs that rent arrears are edging up. At 75.4% by the 6th December, the share of rent fully or partially paid was 7.8% points lower compared to last year, although seasonal issues may have inflated that difference (26). Rental growth has also seen a downturn. At -1.3% y/y in the third quarter on the REIS measure, growth is at its lowest since the start of 2010 (27).
- In line with higher vacancy rates, the Zillow rent index showed the largest declines in growth in major cities, with New York seeing the largest drop of -4.7% y/y in October, closely followed by San Francisco (28). Despite the fall in rental growth, MSCI reported a fall in NOI yields to 4.0% in the third quarter, reversing the rise in the second (29). Government support and record low interest rates have supported capital values (see here), and we now expect a small fall in apartment values of around 1.5% this year.
- In line with that, apartment REIT valuations have also recovered, rising 26% since the end of October. Although that still leaves values down 16% compared to the start of the year (30). The smaller-than-expected drop in capital values means apartment total returns have also done better then anticipated, with a decline to 2.3% in the third quarter on an annual basis (31).
Chart 26: Rent Fully or Partially Paid by First Week (%)
Chart 27: Rental Growth (% y/y)
Chart 28: Zillow Rent Growth (Oct-20, % y/y)
Chart 29: MSCI Apt. NOI Yield (%)
Chart 30: REIT Prices (Index, Jan-20=100)
Chart 31: Apartment Returns Breakdown (%)
Sources: Refinitiv, NMHC, REIS, MSCI, NAREIT, Zillow
Table: Single-Family Indicators
Case-Shiller National (Index)
FHFA Purchase-Only (Index)
Home Sales and Mortgages
Total SF Home Sales (000s Ann.)
New Home Sales
Existing Home Sales
Pending Home Sales (Index)
Total Mortgage Applications (Index)
For Home Purchase
Mortgage Rate (30-Year Fixed, %)
Mortgage Delinquency (30+Days, %)
Mortgage Foreclosure Inventory (%)
Homebuilding and Supply
Single-Family Building Permits (000s Ann.)
Single-Family Starts (000s Ann.)
NAHB Homebuilder Confidence (Index)
Total Months’ Supply of Homes
Months’ Supply of New Homes
Months’ Supply of Existing Homes
Table 2: Multifamily Indicators
CPI Rent of Primary Residence (Index)
Reis Effective Apartment Rent ($)
Zillow Observed Rent Index ($)
Homebuilding and Supply
Multifamily Building Permits (000s Ann.)
Multifamily Starts (000s Ann.)
Multifamily Current Conditions (% Bal.)
Apartment Rental Vacancy Rate (%)
NAREIT Apartment Index ($)