By the end of May, mortgage applications for home purchase had fully reversed their earlier drop. New home sales have also performed better than expected, with a surprise month-on-month rise in April. However, with credit conditions tightening, inventory at record lows and home purchase sentiment at a 30-year low, we doubt existing home sales will see a similar rapid recovery. Builders appear to have resorted to discounting to support sales, and a collapse in house price expectations points to a small fall in overall house prices of 2% to 3% by early next year. Surveys of rental markets show a marked loosening in conditions in recent months, and that will weigh on apartment construction. Significant support for incomes during the coronavirus has kept rental arrears to a minimum, but landlords will find it difficult to raise rents in the current environment.
- By the end of May, mortgage applications for home purchase had fully reversed their earlier drop. (See Chart 1.) New home sales have also performed better than expected, with a surprise month-on-month rise in April. However, with credit conditions tightening, inventory at record lows and home purchase sentiment at a 30-year low, we doubt existing home sales will see a similar rapid recovery. Builders appear to have resorted to discounting to support sales, and a collapse in house price expectations points to a small fall in overall house prices of 2% to 3% by early next year. Surveys of rental markets show a marked loosening in conditions in recent months, and that will weigh on apartment construction. Significant support for incomes during the coronavirus has kept rental arrears to a minimum, but landlords will find it difficult to raise rents in the current environment.
- Economic indicators: An unexpected rise in payroll employment in May builds on signs from some other macro data that economic activity is rebounding faster and more vigorously than we had anticipated. Social distancing means the economy will stage only a partial recovery this year, but the risks to our GDP growth forecast now lie firmly to the upside.
- Single-family: A slight narrowing in the spread against the 10-year Treasury pushed the 30-year mortgage rate to a record low of 3.37% in the last week of May. That has supported home demand, and a small rise in new home sales should help single-family starts recover quickly from their 25% m/m drop in April. It is too soon to see any impact from the coronavirus on headline measures of house price growth, but an 8.6% y/y drop in new home sales prices points to discounting.
- Multifamily: Multifamily housing starts dropped to close to a seven-year low in April, and a sharp fall in the NAHB production index implies construction will be subdued over the next few months. Survey measures show a significant loosening in rental market conditions and, after reaching a four-year high in the final quarter of last year, we expect the three-month absorption rate to drop back. Rental vacancy will also tick-up, and rental growth will slow despite government support preventing a surge in rental arrears.
Chart 1: Mortgage Applications (Index)
- Against expectations of a further decline, May payrolls surprised everyone by rebounding by 2.5 million (2). The headline unemployment rate also edged down to 13.3%, from 14.7%, and the 1.0% fall in average earnings partly unwinds the 4.7% surge the month before, reflecting composition effects as low wage workers were disproportionately fired then rehired (3). The strong jobs report builds on signs from some other macro data that economic activity is rebounding faster and more vigorously than we had anticipated.
- For example, new vehicle sales rebounded strongly in May as dealerships reopened, recouping around half of their decline since February in May (4). Auto sales may have been helped by accumulated savings pots. Government stimulus cheques and a lack of opportunities to spend pushed the personal saving rate to 33% of disposable income in April, double the previous record high (5).
- That said, some industries will struggle to recover with social distancing in place, and the small rebound in ISM non-manufacturing index implies the wider economy will stage only a partial recovery this year (6). But on balance, the data released this week underline that the risks to our forecast for just under a 40% annualised contraction in GDP in the second quarter now lie firmly to the upside (7).
Chart 2: Payroll Employment (Millions)
Chart 3: Avg. Hourly Earnings (% m/m)
Chart 4: Light Vehicle Sales (Million, Annualised)
Chart 5: Personal Savings Rate (% Disp. Income)
Chart 6: ISM Activity Indices
Chart 7: Real GDP
Sources: Refinitiv, C.E.
- A slight narrowing in the spread against the 10-year Treasury yield pushed the 30-year mortgage rate to a record low of 3.37% at the end of May (8). That helps explain a remarkable recovery in mortgage applications for home purchase. A 62% rise since mid-April means home purchase applications are now higher than they were at any time in 2019 (9).
- New home sales have also performed surprisingly well, with a gain of 0.6% m/m in April (10). But several unique factors supported new sales, and we doubt existing sales will see a similar surge. (See Update.) In line with that, the University of Michigan reported that in April just 51% of households thought now was a good time to buy, a 30-year low. On the basis of past form, that points to a further fall in sales (11).
- Indeed, the pending home sales index dropped 21.8% m/m in April, which points to existing home sales falling to 3 million annualised in May (12). With the economy starting to reopen, we suspect that will represent the bottom of the market, but a rapid recovery in sales looks unlikely. Importantly, existing home sales will be held back by a lack of inventory. Potential sellers have pulled or delayed listings, and even as sales declined the existing home inventory fell to a record low in April (13).
Chart 8: 10-Yr Treasury Yield & 30-Yr Mtge Rate (%)
Chart 9: Mortgage Applications (Index)
Chart 10: New Home Sales (000s Ann.)
Chart 11: Existing Home Sales & Good Time to Buy
Chart 12: Existing & Pending Home Sales
Chart 13: Invent. SF Homes for Sale (S. Adj., 000s)
Sources: Refinitiv, MBA, NAHB, NAR, C. Bureau, U. of. Mich.
Single-Family Market (Continued)
- Tighter credit conditions also argue against a surge in sales. According to Ellie Mae, in April average home purchase credit scores rose to a six-year high, and the debt-to-income ratio declined (14). A rising share of mortgage applications are therefore likely to be denied. On a more positive note, the resilience of new home sales is good news for housing starts. Admittedly, SF building permits dropped back in April, and starts are therefore likely to see another decline in May (15).
- The sharp fall in homebuilder confidence also points to a further fall in starts, but as a balance indicator it tends to overstate large swings in sentiment (16). We therefore anticipate SF starts will soon bottom-out, and will have recovered to 900,000 by the end of year. (See Update.) Annual house price growth on the Case-Shiller increased to 4.4% in March, but it is too soon to see any impact from the coronavirus (17).
- While volatile and not adjusted for quality, the price of new homes sold in April were down 8.6% y/y, which implies builders resorted to discounting to maintain cash-flow (18). Existing home values held-up, but a sharp decline in hose price expectations points to a small fall in prices of 2%-3% by early next year. With gains of under 2% y/y in March, New York & Chicago look most vulnerable to price falls (19).
Chart 14: Home Purchase Credit Score & DTI
Chart 15: SF Starts & Building Permits (000s Ann.)
Chart 16: SF Housing Starts & NAHB Confidence (% y/y)
Chart 17: House Prices (% y/y)
Chart 18: New & Existing Median Sold Prices (% y/y)
Chart 19: Case-Shiller House Prices (Mar-20, % y/y)
Sources: Refinitiv, C. Bureau, NAHB, C-Shiller, FHFA, MBA, NAR, E. Mae
- The impact of the coronavirus on the rental market is showing up in survey measures of market tightness. In the first quarter MF NAHB survey, carried out in early April, MF developers reported the highest level of vacancy since the end of 2009 (20). That implies a sharp fall in the three-month absorption rate, which had ticked-up to a four-year high of 58% in the final quarter of last year (21).
- That hit to demand will lead to a fall in MF starts. Indeed, while volatile, starts in April dropped to 241,000 annualised, close to a seven-year low (22). Admittedly, permits saw a more modest drop, so building activity may see a rebound as the economy reopens. However, a sharp drop in the NAHB production index in the first quarter points to subdued starts over the next few months (23).
- Rental vacancy rates have been low and stable since 2014, but are set to rise over the next year (24). That said, with evictions banned and home sales falling sharply, the rise in vacancy will be a lot more modest than that seen during the financial crisis. Even so, the surge in unemployment means rental growth will slow, particularly as rents were already at a record high share of earnings (25).
Chart 20: Measures of Market Tightness
Chart 21: Three-Month Absorption Rate (%)
Chart 22: MF Housing Starts & Permits (000s Ann.)
Chart 23: NAHB Production Index & MF Starts
Chart 24: Rental Vacancy Rates (%)
Chart 25: Rents as Share Earnings (%)
Sources: Refinitiv, NMHC, REIS, C. Bureau, NAHB, C.E.
Multifamily Market (Continued)
- Admittedly, the significant support the government has given to incomes via stimulus cheques and enhanced unemployment insurance has prevented any significant rise in rent arrears. In May, 93.3% of renters had fully or partially paid, compared to 94.8% last year (26). But those benefits will not last forever, and a sharp dip in rental growth expectations implies tenants will be less accepting of rent hikes (27).
- Rental growth had been slowing prior to the arrival of the coronavirus. According to the new Zillow Observed Rent Index, annual growth had slowed to 3.16% in April, a two-year low (28). Yields are set to rise, but again by a relatively small amount. We expect the MSCI NOI yield to rise to 4.6% in the third quarter, before falling back toward 4% (29).
- That implies a 12% drop in capital values, and annual total returns bottoming out at around -7% (30). The strong recovery in asset values, helped in part by record low risk-free interest rates, is an upside risk to our yield forecast. However, to date the value of the NAREIT apartment REIT has seen only a small rise following a 40% drop between late-February and early-April (31).
Chart 26: Rent Fully or Partially Paid by Month End (%)
Chart 27: Rent Growth Expectations (Next 12-Mths, %)
Chart 28: Rental Growth (% y/y)
Chart 29: MSCI Apt. NOI Yield (%)
Chart 30: Apartment Returns Breakdown (%)
Chart 31: NAREIT Apt REIT & 10-Yr Yield
Sources: Refinitiv, NMHC, F.Mae, REIS, C. Bureau, MSCI, NAREIT, C.E.
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 ($)
Matthew Pointon, Property Economist, email@example.com