With growing evidence that the coronavirus is turning into a pandemic, a hit to housing market activity is inevitable. No hard numbers have been released yet, but home sales are vulnerable to any disruption the virus will cause. Delaying a major purchase such as a home is an obvious first step to take, and heading to open houses and viewing homes is not advisable during an outbreak. We therefore expect a drop in the share of households who view now as a good time to buy a home, which was relatively low even before the arrival of Covid-19. The drop in the 10-year Treasury yield to around 0.7% means mortgage rates are likely to fall below their past record low of 3.42%, but that won’t be enough to prevent a decline in home sales over the next few months.
- With growing evidence that the coronavirus is turning into a pandemic, a hit to housing market activity is inevitable. No hard numbers have been released yet, but home sales are vulnerable to any disruption the virus will cause. Delaying a major purchase such as a home is an obvious first step to take, and heading to open houses and viewing homes is not advisable during an outbreak. We therefore expect a drop in the share of households who view now as a good time to buy a home, which was relatively low even before the arrival of Covid-19. (See Chart 1.) The drop in the 10-year Treasury yield to around 0.7% means mortgage rates are likely to fall below their past record low of 3.42%, but that won’t be enough to prevent a decline in home sales over the next few months.
- Economic indicators show that the country was in a strong position before concerns over the coronavirus escalated. But with equity markets in free fall and growing risks of credit markets seizing up, the Fed is set to cut rates by 100bps over the next couple of months.
- Single-family activity will be hit by the coronavirus. Mortgage interest rates are set to drop to record lows, but a widening spread will prevent all of the decline in the 10-year Treasury yield from feeding through to lower home financing costs. Record low inventory was already weighing on home buying sentiment, and fears over the virus are set to push it lower. Homebuilder confidence will also retreat as prospective buyer traffic drops back. That said, given very tight market conditions, single-family housing starts should hold-up relatively well.
- Multifamily prospects are also worsening. Search activity is set to drop back as Americans delay seeking a new place to live. But, with households staying in place longer, absent a sharp drop in employment growth rental vacancy rates are not set for a large rise. There may be some rise in rent arrears if large numbers of workers are forced to stay home. Slower rental growth expectations and a higher risk premium mean yields may experience some upward pressure, but record low risk-free interest rates will provide support to capital values.
Chart 1: Good Time to Buy & Single-Family Home Sales |
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Sources: University of Michigan, NAR |
Economic Backdrop
- The incoming news on the coronavirus outbreak has continued to worsen, with the first US deaths reported last week and the number of daily new cases rising sharply (2). So far, there haven’t been many signs that the outbreak is having a serious economic impact, and the economy was in strong shape before concerns around outbreak escalated. The ISM non-manufacturing index increased in February to a 15-month (3).
- Job creation was also solid in February, with the gain of 275,000 in non-farm payrolls pushing the six-month average to a four-year high of 231,000 (4). Average hourly earnings saw a decent rise of 0.3% m/m, although unfavourable base effects mean the annual rate of growth edged back from 3.1% to 3.0% (5).
- Nevertheless, the continuing slump in stock markets and risk of credit markets seizing up means the Fed will cut interest rates further over the next couple of months (6). We expect a cut of 50bps at both the mid-March and late April FOMC meetings. That will take the fed funds target range back to its emergency low of between 0.0% and 0.25%, a move which the futures market is already fully discounting (7).
Chart 2: Total Coronavirus Cases in US | Chart 3: ISM Activity Indices |
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Chart 4: Change in Payroll Employment (000s) | Chart 5: Average Hourly Earnings |
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Chart 6: S&P 500 & High Yield Bond ETF | Chart 7: Fed Funds Rate Expectations – June 2020 |
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Source: Refinitiv, WHO, Johns Hopkins University CSSE |
Single-Family Market
- As fears around the coronavirus have intensified, a flight to safety and rate cuts by the Fed helped push the 10-year Treasury yield to a record low. We expect increased bank caution will lead to a wider spread but, even so, the 30-year mortgage rate is set to dip below its record low of 3.47% set at the end of 2012 (8). Refinancing activity, which can be done from the safety of your home, is likely to rise further from the seven-year high it reached at the end of February (9).
- But with home search activity set to take a hit, and concerns around the economic outlook weighing on homebuying sentiment, applications for home purchase are unlikely to benefit. Indeed, sentiment was subdued even before the outbreak (10). In large part that reflected a lack of homes for sale, with the number of existing SF homes on the market dropping to a record low in January (11).
- Pending home sales recovered in January, but we suspect some of the sharp drop seen in December has yet to feed through to existing home sales (12). The gradual recovery in realtor confidence in the SF sales outlook did point to a rise in sales over the next six-months (13). But worries over the coronavirus means that confidence is now likely to fall back.
Chart 8: 10-Yr Treasury Yield & 30-Yr Mtge Rate (%) | Chart 9: Mortgage Applications (Index) |
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Chart 10: Good Time to Buy & Home Sales | Chart 11: Inventory Homes for Sale (000s) |
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Chart 12: Existing SF & Pending Home Sales | Chart 13: Existing SF Home Sales & Realtor Confidence |
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Sources: Refinitiv, MBA, NAR, Uni. of Mich. |
Single-Family Market (Continued)
- The healthy number of new homes for sale help explain a growing divergence between the share of households planning to buy a new or existing home over the next six months (14). And a strong traffic of prospective buyers implies new home sales will see further gains over the next couple of months (15). But new home sales are not immune to disruption from the coronavirus, which will weigh on sales growth.
- The virus will also impact home construction. As well as a direct impact to home building supply chains, builders’ willingness to up production will be curtailed. That said, a rise in SF building permits to a 12½-year high in January demonstrates strong market fundamentals, so we are relatively optimistic that starts will see only a modest retreat (16). If workers are forced to stay home, that may lead to an increase in mortgage delinquencies, but lender forbearance should prevent a rise in foreclosures (17).
- House price growth has recovered in recent months, with the Case-Shiller measure reporting a gain of 3.8% y/y in December, a 10-month high (18). But stretched valuations and tighter credit conditions argue against a strong acceleration, and the hit to housing demand from the virus will also weigh on price growth. Data from the FHFA shows house prices in Idaho saw the largest gain in 2019 (19).
Chart 14: Plan to Buy a Home Next Six-Months (%) | Chart 15: New Home Sales & NAHB Buyer Traffic |
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Chart 16: SF Housing Starts & Permits (000s Ann.) | Chart 17: Mortgage Delinquency & Foreclosure Rate (%) |
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Chart 18: House Prices (% y/y) | Chart 19: FHFA House Prices (Q4 2019, % y/y) |
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Sources: Refinitiv, C. Bureau, C-Shiller, FHFA, MBA, NAHB, Conf. Board |
Multifamily Market
- REIS reported a small rise in apartment rental vacancy rates in the fourth quarter of last year (20). As with the home buyer market, the coronavirus will weigh on Americans’ willingness to seek out a new apartment. That will reduce turnover but, with households staying in place longer, it shouldn’t have too much of an impact on vacancy rates. More of a concern are the implications of the virus on employment growth. A substantial fall in job growth may arrest the gradual decline in young Americans living with their parents, which would weigh on household formation (21).
- A slowdown in employment growth would be expected to raise apartment vacancy rates (22). And any dip in demand would occur at a time when a lot of apartments are due to enter the market. After seasonal adjustment, MF starts for rent rose to 107,000 in the fourth quarter, a 33-year high (23).
- Total MF starts and building permits increased further in January, in part reflecting unseasonably warm weather (24). The elevated level of supply over the past couple of years has kept absorption rates relatively low. According to the Census Bureau, the three-month absorption rate has been steady at just under 55% since the start of 2018, down from an average of 60% over 2014 to 2016 (25).
Chart 20: MF Rental Vacancy Rates (%) | Chart 21: Young Living with Parents (%) |
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Chart 22: Apartment Vacancy Rate & Emp. Growth | Chart 23: MF Starts & Comp. for Rent (S.Adj., 000s) |
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Chart 24: MF Starts & Building Permits (000s Ann.) | Chart 25: Three-month Absorption Rate (%) |
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Sources: Refinitiv, REIS, Census Bureau |
Multifamily Market (Continued)
- Effective apartment rental growth dropped to two-year low of 3.8% in the final quarter last year, but the wider CPI measure ticked-up in January to a five-month high 3.76% (26). Based on Zillow data MF rents have seen particularly strong growth in Wisconsin and Arizona, with Vermont and Nebraska seeing the largest declines (27).
- Our current forecast for a modest rise in rental vacancy rates means rental growth will only slow to around 3.5% by the end of the year (28). But, if the coronavirus outbreak worsens, rental growth will see a more substantial fall. The risk premium is also set to rise as investors demand higher returns from property (29).
- Slower rental growth expectations and a higher risk premium mean yields would be expected to rise. But that impact will be offset by a lower risk-free interest rate supporting valuations. Indeed, earlier falls in the 10-year Treasury yield have helped the NAV of a residential REIT rise 30% since the start of 2018 (30). For now, we are not changing our view that yields will continue their recent stability. According to MSCI NOI yields have been around 4.1% since the start of 2018 (31).
Chart 26: Rental Growth (% y/y) | Chart 27: Zillow MF Rental Growth (Jan-20, % y/y) |
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Chart 28: Apartment Vacancy Rate & Rental Growth | Chart 29: Apartment Risk Premium (%) |
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Chart 30: Resi REIT NAV Per Share & 10-Yr Yield | Chart 31: MSCI Apt. NOI Yield (%) |
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Sources: Refinitiv, iShares, REIS, Census Bureau, Zillow, MSCI, C.E. |
Data Summary
Table 1: Single-Family Indicators | ||||||||
Previous Data | Latest Data | |||||||
Published by | Data For | Level | % m/m | % y/y | % m/m | % y/y | ||
Prices | ||||||||
Case-Shiller National (Index) | Case-Shiller | Dec | 214 | 0.5 | 3.5 | 0.5 | 3.8 | |
FHFA Purchase-Only (Index) | FHFA | Dec | 283 | 0.3 | 5.0 | 0.6 | 5.2 | |
CoreLogic (Index) | CoreLogic | Jan | 213 | 0.4 | 3.8 | 0.4 | 4.0 | |
Home Sales and Mortgages | ||||||||
Total SF Home Sales (000s Ann.) | CE Calc. | Jan | 5,614 | 3.8 | 11.6 | -0.1 | 10.9 | |
New Home Sales | Census Bureau | Jan | 764 | 2.3 | 25.5 | 7.9 | 18.6 | |
Existing Home Sales | NAR | Jan | 4,850 | 3.2 | 9.8 | -1.2 | 9.7 | |
Pending Home Sales (Index) | NAR | Jan | 109 | -4.3 | 4.1 | 5.2 | 5.7 | |
Total Mortgage Applications (Index) | MBA | Feb | 686 | 32.7 | 64.2 | 7.5 | 85.7 | |
For Home Purchase | MBA | Feb | 266 | 15.3 | 13.1 | -11.2 | 12.2 | |
For Refinancing | MBA | Feb | 3,111 | 44.5 | 142.0 | 19.6 | 186.2 | |
Mortgage Rate (30-Year Fixed, %) | MBA | Feb | – | 3.82 | – | 3.70 | – | |
Mortgage Delinquency (30+Days, %) | MBA | Q4 | – | 3.97 | – | 3.77 | – | |
Mortgage Foreclosure Inventory (%) | MBA | Q4 | – | 0.84 | – | 0.78 | – | |
Homebuilding and Supply | ||||||||
Single-Family Building Permits (000s Ann.) | Census Bureau | Jan | 987 | 0.8 | 12.2 | 6.4 | 20.2 | |
Single-Family Starts (000s Ann.) | Census Bureau | Jan | 1,010 | 14.1 | 31.8 | -5.9 | 4.6 | |
NAHB Homebuilder Confidence (Index) | NAHB | Feb | 74 | -1.3 | 29.3 | -1.3 | 19.4 | |
Total Months’ Supply of Homes | CE Calc. | Jan | – | 3.8 | – | 3.8 | – | |
Months’ Supply of New Homes | Census Bureau | Jan | – | 5.5 | – | 5.1 | – | |
Months’ Supply of Existing Homes | NAR | Jan | – | 3.5 | – | 3.5 | – | |
Table 2: Multifamily Indicators | ||||||||
Rents | ||||||||
CPI Rent of Primary Residence (Index) | BEA | Jan | 338 | 0.3 | 3.6 | 0.4 | 3.8 | |
Reis Effective Apartment Rent ($) | Reis | Q4 | 1,426 | 1.0 | 4.3 | 0.5 | 3.6 | |
Zillow Multifamily Rent ($) | Zillow | Jan | 1,484 | 0.1 | 3.2 | 0.1 | 2.8 | |
Homebuilding and Supply | ||||||||
Multifamily Building Permits (000s Ann.) | Census Bureau | Jan | 563 | -11.0 | -3.9 | 14.4 | 13.7 | |
Multifamily Starts (000s Ann.) | Census Bureau | Jan | 557 | 25.4 | 68.6 | 0.7 | 71.4 | |
Multifamily Current Conditions (% Bal.) | NAHB | Q4 | 49 | -13.1 | 1.4 | 1.0 | 4.3 | |
Apartment Rental Vacancy Rate (%) | Reis | Q4 | – | 4.6 | – | 4.7 | – | |
REIT | ||||||||
Total Return (Index, 12-Mth Roll. Avg.) | iShares Residential | Feb | 255 | 1.4 | 24.2 | 1.0 | 22.8 | |
Matthew Pointon, Property Economist, +1 646 934 6640, matthew.pointon@capitaleconomics.com