Applications for home purchase have levelled off, but at a level 25% higher than a year ago. That is now feeding through to home sales, with the pending home sales index rising to a 15-year high in July. However, a lack of inventory will soon put a brake on home sales, and surging lumber prices will hold back single-family housing starts. Part of the rise in home demand may reflect households leaving cities for the suburbs. Indeed, apartment rental absorption rates have dropped back, and rental growth has slowed on most measures. While annual rental growth has not yet turned negative, we expect it will soon, with New York and San Francisco set to see the largest falls.
- Applications for home purchase have levelled off, but at a level 25% higher than a year ago. That is now feeding through to home sales, with the pending home sales index rising to a 15-year high in July. However, a lack of inventory will soon put a brake on home sales, and surging lumber prices will hold back single-family housing starts. Part of the rise in home demand may reflect households leaving cities for the suburbs. Indeed, apartment rental absorption rates have dropped back, and rental growth has slowed on most measures. (See Chart 1.) While annual rental growth has not yet turned negative, we expect it will soon, with New York and San Francisco set to see the largest falls.
- Economic indicators: Unemployment has fallen back faster than we initially expected, but there was a further increase in the number of permanent job losers, highlighting that scarring from the pandemic is rising. Even as enhanced unemployment benefits expired, consumer confidence has held-up, and strong consumption has helped drive a rise in manufacturing activity.
- Single-family: Record low mortgage rates have continued to support housing demand. Mortgage applications for home purchase have been stable in recent weeks, but home sales have continued to recover, with new homes doing particularly well. However, given very low inventory levels, tighter credit standards and elevated unemployment we expect home sales will edge back over the rest of the year.
- Multifamily: As lockdowns have eased, multifamily housing starts have bounced back to close to 33-year highs. But a fall in net absorption since the start of the year points to a rise in vacancy rates over the next few months, and subdued developer confidence indicates MF starts will fall back over the remainder of the year. Annual rental growth has slowed, and we expect it will soon turn negative.
Chart 1: Rental Growth (% y/y)
Sources: Refinitiv, REIS, Zillow
- The slighter softer 1,371,000 gain in non-farm payrolls in August was flattered by the hiring of 238,000 temporary workers for the 2020 Census, and means that more than half of those who lost their jobs between March and April remain out of work (2). The unemployment rate dropped to 8.4%, but there was a further increase in the number of permanent job losers, highlighting that scarring from the pandemic is rising (3).
- Core inflation rebounded to 1.7%, from 1.6%, with headline inflation rising to 1.3%, from 1.0% (4). Dwindling inventories imply inflation will trend higher, and the Fed will not rush to bring it down. Indeed, a prolonged period of under-shooting the 2% target means the FOMC will now aim “to achieve inflation that averages 2% over time“. That may mean increased assets purchases, which have recently flatlined (5).
- Manufacturing activity has continued to recover, driven by strong consumption (6). Indeed, the marginal increase in consumer confidence in early August adds to the message from the high-frequency indicators that any negative impact from the expiry of the $600 additional Federal unemployment benefits at the end of July has so far been offset by a positive impact from the downward trend in new virus cases (7).
Chart 2: Non-Farm Payroll Employment (Millions)
Chart 3: Unemployment Rate by Reason (%)
Chart 4: CPI Inflation (%)
Chart 5: Fed Holding of MBS ($bn)
Chart 6: ISM Activity Indices
Chart 7: Uni. of Mich. Consumer Confidence (Index)
Sources: Refinitiv, C.E.
- Mortgage rates where more-or-less flat at close to record lows over August, averaging 3.1% (8). That relative stability was also evident in mortgage applications. After a surge in April and May, applications for home purchase have since been treading water, at a level around 25% higher than a year ago (9). Refinancing applications have also been flat, which is surprising given the sharp fall in mortgage rates.
- The loss of momentum in housing demand is consistent with measures of homebuying sentiment. After a strong recovery in June, the share seeing now as a good time to buy has fluctuated around its pre-COVID level (10). Tight credit conditions will also be constraining demand to some extent. According to Ellie Mae credit scores on conventional home purchase mortgages jumped to 758 in July, a seven-year high (11).
- A lack of inventory will also keep a lid on housing market activity. The months’ supply of new and existing homes has dropped back in recent months, the former to a record low (12). Alongside a fading of pent-up demand from the spring this implies that after another decent rise in August, existing home sales will then flatten out (13). Indeed, we wouldn’t be surprised if they edge back over the next few months.
Chart 8: 10-Yr Treasury Yield & 30-Yr Mtge Rate (%)
Chart 9: Mortgage Applications (Index)
Chart 10: Good Time to Buy (%)
Chart 11: Conv. Home Purchase Credit Score
Chart 12: Months’ Supply Homes for Sale
Chart 13: Existing & Pending Home Sales
Sources: Refinitiv, MBA, NAR, C. Bureau, E. Mae, F.Mae
Single-Family Market (Continued)
- New home sales have performed particularly well, and increased their share in total SF home sales (14). In part that reflects new sales being recorded earlier in the sales process, but healthier inventory and streamlined selling practices will also have helped. In any event, strong demand is good news for housing starts which, after a swift recovery in recent months, are set for further gains (15).
- However, a surge in lumber prices, partly driven by increased home improvement spending, will act as a constraint on starts. Even after dropping back, future prices for delivery in November are up 66% y/y (16). Widespread forbearance meant the mortgage delinquency rate jumped to 8.2% in the second quarter (17). The foreclosure start rate dropped to a record low as banks were banned from initiating proceedings. But it will pick-up toward the end of the year as lenders start working through the backlog.
- According to Case-Shiller, national house price growth has been stable at 4.3% over the past couple of months (18). But growth in the 10-City index has slowed, which may reflect some people leaving cities for the suburbs. House price expectations have picked-up over the past couple of months, but remain low compared to their pre-COVID rate (19). That argues against an acceleration in price growth.
Chart 14: New Home Share of all SF Sales (%)
Chart 15: SF Starts & Building Permits (000s Ann.)
Chart 16: Lumber Price Futures ($1,000 Sq. Ft., Nov.)
Chart 17: Delinquencies & Foreclosure Start Rate (%)
Chart 18: House Prices (% y/y)
Chart 19: House Price Expectations Next 12-Mths (%)
Sources: Refinitiv, C. Bureau, C-Shiller, NAR, MBA, NY Fed, C.E.
- MF starts for rent fell back 38% q/q in second quarter, and were down 25% compared to a year ago (20). According to REIS completions have also seen a sharp fall since 2019, which will reflect the impact of construction shutdowns earlier in the year. Since then, MF starts and building permits have seen a strong recovery, with starts close to 33-year highs in July (21).
- That indicates developers are still confident about future rental demand. That said, even after a rise in the second quarter, the NAHB MF production index is low by past standards and points to a moderation in MF starts (22). Low rental vacancy rates may be supporting sentiment. The fall in the Census Bureau measure reflects measurement difficulties, but vacancy on the REIS measure only saw a small rise to 4.9% in the second quarter (23).
- That said, the fall in the net absorption rate seen since late 2019 points to a rise in vacancy over the next few months (24). We expect apartment vacancy will rise to 5.5% by early next year. That implies rental growth will continue to slow. Annual growth has fallen back on the CPI, Zillow and REIS measures over the past few months, although it has not yet turned negative (25).
Chart 20: MF Starts for Rent & REIS Comp. (000s Ann.)
Chart 21: MF Building Permits & Starts (000s)
Chart 22: NAHB MF Confidence (% Bal.)
Chart 23: Rental Vacancy Rates (%)
Chart 24: REIS Net Absorption Rate & Vacancy (%)
Chart 25: Rental Growth (% y/y)
Sources: Refinitiv, REIS, C. Bureau, NAHB, Zillow, C.E.
Multifamily Market (Continued)
- The sharper drop in the REIS measure of rents, which accounts for free months, may reflect increased use of incentives by landlords. That said, effective rents as a share of market rents have increased since the start of the year (26). Data from Zillow shows the New York metro has seen the sharpest drop in growth, with rents in July unchanged from a year earlier (27).
- The latest data from the NMHC showed a slight increase in rent arrears in the first week of September (28). That could reflect the expiration of enhanced unemployment insurance, but disruption due to the Labor Day holiday may also be to blame. MSCI reported a slight rise in apartment NOI yields in the second quarter, to a three-year high of 4.2% (29). We expect yields will rise further over the next year to 4.4%.
- That implies capital value growth will fall to -8% y/y, with total returns dropping to -3.5% in the second half of the year (30). The value of the NAREIT apartment REIT has underperformed relative to SF REITs and homebuilder share prices (31). Evidence that some households are leaving cities for the suburbs, or that markets believe they will leave, may help explain that trend. But we doubt that movement away from cities will persist. (See Focus.)
Chart 26: Effective as Share of Market Rent (%)
Chart 27: Zillow Rent Growth (% y/y)
Chart 28: Rent Fully or Partially Paid by First Week (%)
Chart 29: MSCI Apt. NOI Yield (%)
Chart 30: Apartment Returns Breakdown (%)
Chart 31: REIT & Builder Price (Index, Jan-20=100)
Sources: Refinitiv, NMHC, MSCI, NAREIT, Zillow, 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