The coronavirus will cause a severe contraction in housing market activity. Mortgage applications for home purchase have already seen a 33% drop from their peak in late January. A surge in unemployment to record highs, and restrictions on movement, mean home sales will see a fall of 50% to 60% q/q between the first and second quarters. But action by states and Congress will prevent a surge in mortgage foreclosures and forced sellers, preventing a crash in house prices. With employment already seeing large declines, household formation will grind to a halt and absorption rates for new apartments are set to hit record lows. But, with no one able to move and evictions banned in most places, overall rental vacancy rates will see only a small rise. A rise in yields, and drop in rental growth, means total returns to apartments will drop to around -5% y/y by the end of the year.
- The coronavirus will cause a severe contraction in housing market activity. Mortgage applications for home purchase have already seen a 33% drop from their peak in late January. (See Chart 1.) A surge in unemployment to record highs, and restrictions on movement, mean home sales will see a fall of 50% to 60% q/q between the first and second quarters. But action by states and Congress will prevent a surge in mortgage foreclosures and forced sellers, preventing a crash in house prices. With employment already seeing large declines, household formation will grind to a halt and absorption rates for new apartments are set to hit record lows. But, with no one able to move and evictions banned in most places, overall rental vacancy rates will see only a small rise. A rise in yields, and drop in rental growth, means total returns to apartments will drop to around -5% y/y by the end of the year.
- Economic indicators: As a result of the coronavirus and the containment measures put in place to constrain its spread, we now anticipate an unprecedented 40% annualised decline in second-quarter GDP, with the unemployment rate spiking to 12.5% within a few months.
- Single-family: Mortgage interest rates have been volatile, as a rush to liquidity caused disruption in the MBS market. Action by the Fed helped stabilise the market, and the 30-year rate had dropped to a record low by the end of March. Clearly low interest rates will not prevent a collapse in home sales. But they should help the market recover once the virus has been brought under control. That will encourage homebuilders to look through the temporary drop in demand, but a decline in housing starts is inevitable.
- Multifamily: Developers are likely to delay some new apartments, but that won’t prevent a sharp drop in the absorption rate. Record high unemployment will lead to the first drop in effective rental growth since the financial crisis, but it should recover once the disruption from the virus has passed. Apartment REITs have seen a sharp drop in price, in line with our view that capital value growth will fall to around -10% by the end of the year.
Chart 1: Mortgage Applications (Index)
- As workers have been furloughed due to the coronavirus, jobless claims have surged with 10 million claims being lodged in the past two weeks alone (2). We expect that figure to rise to 14 million over the next month or so, which suggests the unemployment rate will surge to more than 12% (3). As the economy re-opens in the third quarter, the unemployment rate should drop back relatively quickly.
- In contrast to traditional downturns, the impact of this recession will be concentrated in the services sector rather than manufacturing. Indeed, the Markit services PMI saw a record fall in March (4). We now anticipate an unprecedented 40% annualised decline in second-quarter GDP, before a rebound of 19% q/q annualised in the third quarter (5).
- We expect the recovery to continue into the next year, but even so by the end of 2022 our forecasts imply that the level of real GDP will still be 2% lower than we previously projected three months ago (6). The crisis has already triggered an unprecedented response from monetary and fiscal policy, with the $2.2trn fiscal stimulus set to push the Federal budget deficit to 10% of GDP this year (7).
Chart 2: Initial Jobless Claims
Chart 3: Unemployment Rate (%)
Chart 4: Markit Survey-Based Activity Indices
Chart 5: Real GDP
Chart 6: Real GDP ($tn)
Chart 7: Federal Budget Balance (As % of GDP)
Source: Refinitiv, Markit, C.E.
- A rush to liquidity caused severe disruption in the MBS market, and as a result the spread between the 10-year Treasury yield and 30-year mortgage rate blew out to 11-year highs (8). That prompted the Fed to buy a significant amount of agency MBS (9). That action helped stabilise the market, and mortgage rates had dropped to a record low 3.47% by the end of March. However, lender caution and capacity constraints mean rates are unlikely to fall below 3.3%. (See Update.)
- Record low mortgage rates have boosted refinance demand, but surging unemployment and movement restrictions pushed applications for home purchase to 3½-year lows (10). The March Conference Board index showed only a modest dip in those planning to buy a home (11). But we expect that April will show a more severe decline, and purchase applications are set to see a 50% drop from their recent peak.
- The small dip in prospective buyers of new homes reported by the NAHB pre-dated the restrictions on movement (12). A more recent survey showed 93% of builders reporting a dip in traffic due to the virus. Similarly, it is too soon to see any impact from the virus on existing and pending home sales (13). But the latest data show both new and existing home sales were in a strong position prior to the outbreak.
Chart 8: 10-Yr Treasury Yield & 30-Yr Mtge Rate (%)
Chart 9: Fed Holdings of MBS ($bn)
Chart 10: Mortgage Applications (Index)
Chart 11: Plan to Buy Home Next Six-Months (%)
Chart 12: New Home Sales & NAHB Buyer Traffic
Chart 13: Existing SF & Pending Home Sales
Sources: Refinitiv, MBA, NY Fed, Conf. Board, NAHB, NAR, C. Bureau
Single-Family Market (Continued)
- The shutdown of large parts of the country will depress home sales. We now expect new and existing home sales to see a 50% to 60% q/q fall between the first and second quarters (14). As restrictions are lifted, pent-up demand from the spring buying season will help sales recover over the second half of the year. But it will take time for household incomes and savings to recover, so we doubt sales will have returned to their pre-outbreak level by end-2021.
- Homebuilders would normally look through a short term temporary hit to demand, particularly given strong market fundamentals. Record low existing home inventory will support demand once the virus has passed (15). But supply chain and labour market disruption will lead to a drop in starts in the second quarter, and labour and material constraints means that loss of output won’t be made up (16).
- Lending standards have been relatively tight since the financial crisis (17). Coupled with government action, that will support forbearance and prevent a rise in foreclosures this year (18). Without any rise in forced sellers house prices will see a decline of around 4% by the start of 2021 (19).
Chart 14: Home Sales Forecast (000s Ann.)
Chart 15: Inventory Homes for Sale (000s)
Chart 16: SF Housing Starts (000s Ann.)
Chart 17: Median Credit Score for Home Purchase Mtge
Chart 18: Mortgage Delinquency & Foreclosure Rate (%)
Chart 19: House Prices (% y/y)
Sources: Refinitiv, C. Bureau, C-Shiller, NY Fed, MBA, C.E.
- MF developer production expectations ticked up at the end of last year on the back of an improvement in vacancy expectations (20). And, while volatile, the 619,000 annualised units started in January was the highest since July 1986. But disruption to supply chains and workers staying at home due to the coronavirus mean starts are set for a sharp slowdown in the second quarter. We anticipate a drop to 225,000 annualised, and then a recovery to 320,000 annualised by end-2021 (21).
- Apartment completions were set to be strong in 2020, although some developers are now likely to hold units from the market (22). Strong apartment construction has been driven by solid household formation over the past couple of years (23). But the impact of the virus on employment and incomes means formation is set to drop sharply over the next couple of quarters.
- That will lead to a drop in the absorption rate for new apartments, from 55% at the end of 2019 to 40% by the third quarter of 2020 (24). The collapse in employment, and subsequent hit to incomes, would normally be expected to lead to a surge in the overall apartment rental vacancy rate to over 12% (25).
Chart 20: NAHB MF Survey (% Bal.)
Chart 21: MF Housing Starts (000s Ann.)
Chart 22: MF Starts for Rent & Comp. (S.Adj., 000s)
Chart 23: Ann. Household Formation (Millions)
Chart 24: Three-month Absorption Rate (%)
Chart 25: MF Vacancy Rate & Emp. Growth
Sources: Refinitiv, REIS, C. Bureau, NAHB, C.E.
Multifamily Market (Continued)
- But with existing tenants unable to move, and with measures in place to prevent evictions, we expect only a modest rise in the REIS measure of apartment vacancy rate to around 5.5% in the second quarter (26). Nevertheless, with incomes taking a significant hit, rental growth is set to turn negative for the first time since the financial crisis. After all, rents were already taking up a record share of income (27).
- We expect the REIS measure of effective rental growth will bottom out at around -1% y/y in the third quarter, and then see a recovery to 2% y/y by end-2021 (28). The impact of the virus means yields are also set to rise. We expect the MSCI NOI yield will rise from 4.12% in the first quarter to 4.6% by the third, before it gradually falls back toward 4.2% (29).
- That implies around a 10% fall in capital values by the end of 2020, and a total return of -5% (30). That dip in capital values has been reflected in REIT valuations. The NAREIT apartment index has dropped 35% since it peaked in late February, to a level last seen in late 2014 (31).
Chart 26: REIS Apartment Rental Vacancy Rate (%)
Chart 27: Rent Share of Earn. (Index, 90-15 Avg. =100)
Chart 28: REIS Effective Rental Growth (% y/y)
Chart 29: MSCI Apt. NOI Yield (%)
Chart 30: Apartment Returns Breakdown (%)
Chart 31: NAREIT Apt REIT ($ Index, Dec-93=100)
Sources: Refinitiv, REIS, C. Bureau, MSCI, C.E.
Table 1: 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 ($)
Zillow Multifamily Rent ($)
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, firstname.lastname@example.org