The 30-year mortgage rate fell below 3% last week, but we doubt it will stay there for long. A rise in 10-year Treasury yields means mortgage rates will soon tick-up. That will weigh on housing demand, which had already been losing steam. Indeed, mortgage applications for home purchase fell to a 5½-month low last week, and new home sales dropped back in September. The past surge in home sales, coupled with record low inventory, has helped drive an acceleration in house price growth, with FHFA reporting a rise to 8.1% y/y in August, a 14½-year high. By contrast, rental growth slowed to -1.3% y/y in the third quarter according to REIS. But rent arrears are low, and the positive news on vaccine development helped drive a recovery in apartment REIT valuations.
- The 30-year mortgage rate fell below 3% last week, but we doubt it will stay there for long. A rise in 10-year Treasury yields means mortgage rates will soon tick-up. That will weigh on housing demand, which had already been losing steam. Indeed, mortgage applications for home purchase fell to a 5½-month low last week, and new home sales dropped back in September. The past surge in home sales, coupled with record low inventory, has helped drive an acceleration in house price growth, with FHFA reporting a rise to 8.1% y/y in August, a 14½-year high. (See Chart 1.) By contrast, rental growth slowed to -1.3% y/y in the third quarter according to REIS. But rent arrears are low, and the positive news on vaccine development helped drive a recovery in apartment REIT valuations.
- Economic indicators: GDP rebounded 33.1% annualised in the third quarter, but that still left the economy 3.5% smaller than it was in the final quarter of last year. The introduction of one or more highly effective vaccines early next year would be a game-changer and would prompt us to revise up our 2021 GDP forecast, possibly significantly.
- Single-family: Record low inventory and waning pent-up demand from the spring means home sales are now edging back, and with mortgage rates also set to inch-up we expect demand will fall further over the remainder of the year. But with homebuilder confidence at record highs that shouldn’t stop a steady rise in housing starts.
- Multifamily: Apartment vacancy rates continued to edge up, reaching 5% in the third quarter. The luxury apartment sector looks particularly hard-hit, with the share of units on the market with an asking rent above $2,000 jumping to 26%. Rental growth has therefore slowed but, so far, the impact on yields has been small, and that has supported total returns.
Chart 1: House Prices (% y/y)
Sources: Case-Shiller, FHFA
- GDP rebounded 33.1% annualised in the third quarter, but that still left the economy 3.5% smaller than it was in the final quarter of last year (2). With coronavirus infections hitting a record high in recent days (3), and any additional fiscal stimulus unlikely to arrive until, at the earliest, the start of next year, further progress will be slower. We expect fourth-quarter GDP growth to be only 4.5%. But the introduction of one or more highly effective vaccines early next year would prompt us to revise up our 2021 GDP forecast.
- The 638,000 rise in non-farm payrolls in October is stronger than it looks as it included a 147,000 drop in temporary Census employment, so the labour market recovery still has plenty of momentum (4). Indeed, the unemployment rate fell all the way to 6.9%, from 7.9%. The number of permanent job losers also fell back slightly, leaving the permanent unemployment rate unchanged at 2.3% (5).
- The University of Michigan’s consumer confidence index edged higher to 81.8 in October, from 80.4 a month earlier, confirming that the stronger-than-expected consumer recovery has continued (6). And the modest rise in core consumer prices in October suggests that the previous upward pressure resulting from supply constraints may be starting to fade (7).
Chart 2: Real GDP ($tn, 2012 Prices)
Chart 3: COVID-19 Infections & Deaths
Chart 4: Non-Farm Payroll Employment (Millions)
Chart 5: Unemployment Rate by Reason (%)
Chart 6: UoM Consumer Confidence
Chart 7: CPI Inflation
Sources: Refinitiv, Uni. of Mich., C.E.
- The 30-year mortgage rate dropped below 3% in the first week of November and has fallen 105bps over the past year. However, good news on COVID-19 vaccine development led to an increase in the 10-year Treasury yield, and that suggests mortgage rates will soon rise back above 3% (8). That said, a narrowing in the spread against 10-year yields implies mortgage rates will stay close to record lows (9).
- The narrowing in spreads suggests lenders are becoming less risk adverse, perhaps due to the high volume of mortgage repayments. (See Update.) But we wouldn’t want to overstate that impact. Indeed, credit scores on new home purchase loans rose again in September (10). In any event, the latest drop in mortgage interest rates has not boosted home demand, with mortgage applications for home purchase dropping to a 5½-month low in the first week of November (11).
- That moderation in demand is now feeding through to home sales. Existing SF home sales hit a 14-year high in September, but the pending home sale index implies sales will edge back in October (12). Indeed, new home sales, which are recorded earlier in the home buying process, declined by 3.5% m/m in September, although that still left them up 32% compared to a year earlier (13).
Chart 8: 10-Yr Treasury Yield & 30-Yr Mtge Rate (%)
Chart 9: Mortgage Rate Spread (% Points)
Chart 10: Conv. Purchase Credit Score & DTI (S.Adj.)
Chart 11: Mortgage Applications (Index)
Chart 12: Existing SF & Pending Home Sales
Chart 13: New Home Sales (000s Ann.)
Sources: Refinitiv, MBA, NAR, C. Bureau, E. Mae
Single-Family Market (Continued)
- Strong home sales look to have boosted the homeownership rate. The headline figure in the third quarter was biased upward due to survey issues during COVID-19, but data for just September, when full in-person interviews could be conducted, showed a figure of 66.1%, well up from the start of 2020 (14). Record low inventory is acting as a constraint on sales, but that is good news for homebuilders. At 85 in October the NAHB measure of confidence was at its highest since records began in 1985 (15).
- In line with that, SF housing starts were up 8.5% m/m in September, and a rise in building permits to a 13½-year high implies starts will rise further in October (16). Lower lumber prices are supporting starts, but a lack of lots and labour means growth is set to slow. After jumping to 8.2% in the second quarter, mortgage delinquencies dropped back to 7.6% in the third, as use of forbearance declined (17).
- Surging home demand, coupled with record low inventory, has led to a resurgence in house price growth. Case-Shiller reported a rise to 5.7% y/y in August, and the FHFA index jumped to 8.1% y/y, a 14½-year high (18). The median price of existing homes has seen a larger rise than new homes (19). That looks to reflect issues on the supply side, with fewer more expensive new homes available to buy. (See Update.)
Chart 14: Homeownership Rate (%)
Chart 15: NAHB Homebuilder Conf. & Mths Supply
Chart 16: SF Starts & Building Permits (000s Ann.)
Chart 17: Mortgage Del. & Foreclosure Start Rate (%)
Chart 18: House Prices (% y/y)
Chart 19: Median Sold New & Exist. Home Price ($000)
Sources: Refinitiv, C. Bureau, C-Shiller, FHFA, MBA, NAHB
- The Q3 REIS data showed a further weakening in apartment markets. The net absorption rate dropped further, to 0.13%, although that compares to a rate of -0.37% during the financial crisis (20). Falling absorption is now feeding through to higher vacancy. The apartment vacancy rate rose to 5% in the third quarter, a nine-year high (21). We expect it will rise further to around 5.5% by the end of the year.
- One factor preventing a more pronounced rise in vacancies has been a sharp fall in apartment completions, which can be partly explained by construction delays during the COVID-19 shutdowns. REIS reported just 33,000 completions in the third quarter, down 56% from Q2 2018 (22). For now, developers have continued to break ground on new projects. But multifamily starts and building permits edged back in August and September, and we suspect they will continue to fall (23).
- Despite the relatively modest rise in vacancy, REIS reported a sharp downturn in effective rental growth, to -1.3% y/y in the third quarter. That’s a larger fall than we expected, and the risks to our forecast for growth to end the year at -1.5% y/y now lie to the downside (24). The Zillow index showed a more modest slowdown to 1.4% y/y in September, but rents were falling in New York, San Francisco and Boston (25).
Chart 20: REIS Net Absorption Rate (%)
Chart 21: REIS Apt. Vacancy Rates (%)
Chart 22: REIS Apt. Completions (000s Ann.)
Chart 23: MF Building Permits & Starts (000s)
Chart 24: Rental Growth (% y/y)
Chart 25: Zillow Rent Growth (Sep-20, % y/y)
Sources: Refinitiv, REIS, C. Bureau, Zillow
Multifamily Market (Continued)
- The sharp slowdown in rental growth reported by REIS was apparent in both effective and asking rents, which implies landlords have cut rents rather than increase incentives such as free rental periods (26). Early evidence also suggests that the luxury apartment sector has been hit the hardest as the wealthy have left cities. According to the Census Bureau, in the third quarter the share of vacant MF units asking over $2,000 a month rose to 26%, from 21% in Q2 (27).
- But there is some good news. For one, there is still limited evidence of a surge in rent arrears, even as Congress has failed to pass a further support package (28). Renters may be using savings to get by, which raises the risk of rise in arrears if new support is not forthcoming. There was also a surprise fall in apartment NOI yields in the third quarter according to MSCI, to 4.05% from 4.16% in Q2 (29).
- That will provide some support to total returns as rental growth slows. We estimate total returns of around 3.0% in the third quarter (30). The announcement of a promising vaccine has also given apartment REITs a boost, with the NAREIT index rising 13% since the end of last week, while the single-family REIT index declined 3% (31).
Chart 26: Effective Rents as Share of Asking (%)
Chart 27: Distribution of MF Asking Rents (%)
Chart 28: Rent Fully or Partially Paid by First Week (%)
Chart 29: MSCI Apt. NOI Yield (%)
Chart 30: Apartment Returns Breakdown (%)
Chart 31: REIT Prices (Index, Jan-20=100)
Sources: Refinitiv, REIS, C. Bureau, MSCI, NAREIT, C.E.
Table: Single-Family Indicators
Case-Shiller National (Index)
FHFA Purchase-Only (Index)
Home Sales and Mortgages
Total SF Home Sales (000s Ann.)
New Home Sales
Existing Home Sales
Pending Home Sales (Index)
Total Mortgage Applications (Index)
For Home Purchase
Mortgage Rate (30-Year Fixed, %)
Mortgage Delinquency (30+Days, %)
Mortgage Foreclosure Inventory (%)
Homebuilding and Supply
Single-Family Building Permits (000s Ann.)
Single-Family Starts (000s Ann.)
NAHB Homebuilder Confidence (Index)
Total Months’ Supply of Homes
Months’ Supply of New Homes
Months’ Supply of Existing Homes
Table 2: Multifamily Indicators
CPI Rent of Primary Residence (Index)
Reis Effective Apartment Rent ($)
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, firstname.lastname@example.org