The impact of the coronavirus is showing up in housing market activity. Pending home sales plummeted 21% m/m in March, which points to existing home sales falling to just over 4m annualised in April. We expect they will eventually bottom out closer to 3m. Admittedly, mortgage applications for home purchase recovered over the second half of April, but with large parts of the country still shut down that won’t translate into higher sales. Mortgage delinquencies will match the highs seen during the financial crisis, but foreclosures will be far lower. A lack of forced sales will provide some support to house prices, but a collapse in price expectations means growth will slow from 4.2% y/y to around -4.0% y/y by early next year.
- The impact of the coronavirus is showing up in housing market activity. Pending home sales plummeted 21% m/m in March, which points to existing home sales falling to just over 4m annualised in April. (See Chart 1.) We expect they will eventually bottom out closer to 3m. Admittedly, mortgage applications for home purchase recovered over the second half of April, but with large parts of the country still shut down that won’t translate into higher sales. Mortgage delinquencies will match the highs seen during the financial crisis, but foreclosures will be far lower. A lack of forced sales will provide some support to house prices, but a collapse in price expectations means growth will slow from 4.2% y/y to around -4.0% y/y by early next year.
- Economic indicators: GDP contracted 4.8% q/q annualised in the first quarter, and we expect it will see a -40% q/q annualised drop in the second. Issues with misclassifying absent workers meant the unemployment rate increased to ‘only’ 14.7% in April, but without the distortion it would have been closer to 20%.
- Single-family: Mortgage interest rates dropped to a record low of 3.4% at the end of April, which helped mortgage applications for home purchase recover some of the drop seen over late March and early April. But tightening mortgage lending standards, and the continuing shut down of large parts of the country, means not all those applications will translate into home sales. After a strong rise in 2019, the homeownership rate is set to flatten out over the next year or so.
- Multifamily: Despite a strong rise in multifamily starts over the past couple of years, developers brought the lowest number of units to the market since the start of 2013 in the first quarter. That will help prevent a large rise in vacancy rates, but rental growth is still likely to turn negative later in the year. Despite the surge in unemployment, rental arrears have seen only a small rise. Government support in the form of enhanced unemployment insurance should help keep arrears low.
Chart 1: Pending and Existing Home Sales
- The levelling off in new COVID-19 infections suggests that the lockdowns in place across much of the country are starting to contain the epidemic (2). Nevertheless, the economy will take an unprecedent hit. GDP contracted 4.8% q/q annualised in the first quarter (3), but since the lockdowns only really began in the final two weeks of the quarter, activity must have fallen very sharply in the second half of March.
- The drop in the ISM manufacturing index to 41.5 in April was more modest than expected and leaves it consistent with GDP falling at a 5% annualised pace (4). But we fear the surveys are not capturing the scale of the downturn, and expect second quarter GDP to fall to -40% q/q annualised. The loss of 20.5 million jobs in April was expected, and pushed the employment-to-population ratio to a record low of 51% (5).
- The unemployment rate climbed to 14.7%, below expectations. But that was principally because the BLS is having problems misclassifying absent workers. Indeed, the insured unemployment rate has climbed to 15.1%, consistent with the unemployment rate rising close to 30% (6). The 0.8% m/m fall in consumer prices last month reflected the sharp drop in energy prices together with an unprecedented 0.4% m/m fall in core CPI (7). With demand still exceptionally weak, we expect further declines in the coming months.
Chart 2: Daily New COVID-19 Cases
Chart 3: Real GDP
Chart 4: ISM Manu. Prod. Index & GDP
Chart 5: Employment to Population Ratio
Chart 6: Insured & Official Unemployment Rate (%)
Chart 7: CPI Inflation (% y/y)
Source: Refinitiv, Markit, C.E.
- Despite an elevated spread against the 10-year Treasury yield, the 30-year mortgage rate dropped to a record low 3.4% at the end of April (8). That helped applications for home purchase recover in the second half of April (9). But refinance demand dropped back. That might reflect the surge in forbearance to 7.5% of mortgages, which reduces the number eligible for refinance.
- Evidence of a potential rebound in demand also comes from traffic to Zillow for sale listings. After an initial 18% y/y drop, traffic recovered and was up 18% y/y by mid-April (10). But the recovery in housing demand may not last. While homebuying sentiment initially held up on the Fannie Mae and the University of Michigan measures, Fannie Mae reported a sharp drop in the share seeing now as a good time to buy to 48% in April, the lowest since the survey began in 2010 (11).
- Indeed, with large parts of the economy locked down, and banks cautious about who they lend to, higher mortgage applications won’t necessarily translate into higher home sales. Data from Ellie Mae showed the median credit score rose to 756 in March, close to a five-year high (12). And March pending home sales dropped 20.8% m/m, pointing to existing home sales falling to just over 4m annualised in April (13).
Chart 8: 10-Yr Treasury Yield & 30-Yr Mtge Rate (%)
Chart 9: Mortgage Applications (Index)
Chart 10: Zillow Sale Listings Traffic (% y/y)
Chart 11: Good Time to Buy (%)
Chart 12: Conv. Home Purchase Median Credit Score
Chart 13: Existing & Pending Home Sales
Sources: Refinitiv, MBA, NY Fed, Conf. Board, NAHB, NAR, C. Bureau
Single-Family Market (Continued)
- Sales are likely to fall further in May. Realtors’ confidence in the SF sales outlook over the next six-months plummeted in March, consistent with sales falling 3.5m annualised, and we expect they will drop further (14). Strong new home sales last year helped boost the under-35 homeownership rate, but the sharp drop in sales over the next couple of months will bring a halt to that progress (15).
- Homebuilder confidence dropped to an eight-year low in April, and that implies SF starts will fall back to where they were in 2014 (16). That will keep housing market conditions tight, as will a lack of forced sales. Widespread forbearance means that even as delinquency rates approach the peak see during the financial crisis, the foreclosure rate will see only a small rise in 2021 (17).
- A lack of homes for sale will in turn prevent a crash in house prices. And house price growth was beginning to accelerate prior to the arrival of the coronavirus (18). However, a sharp downturn in house price expectations implies some drop in values is likely. According to Fannie Mae, in April households expected prices to drop 2% over the next year, the lowest reading since the survey began in 2011 (19). We expect annual price growth on the Case-Shiller measure to fall to -4% by early 2021.
Chart 14: Home Sales & Realtor Confidence
Chart 15: Under-35 HO Rate & New Home Sales (% y/y)
Chart 16: SF Housing Starts & NAHB Confidence
Chart 17: Mortgage Delinquency & Foreclosure Rate (%)
Chart 18: House Prices (% y/y)
Chart 19: House Price Expectations Next 12-Months (%)
Sources: Refinitiv, C. Bureau, C-Shiller, NY Fed, MBA, C.E.
- Despite overall strong household formation, a shift to homeownership meant that the number of rental households dropped by 600,000 in the year to the first quarter (20). That dip predated the impact of the coronavirus, but it showed up in the NMHC survey of apartment market tightness. At 10% in the second quarter, the balance of investors reporting tighter market conditions was at its lowest since 2002 (21).
- It is too soon for measures of rental vacancy to show any COVID impact, with REIS reporting an unchanged rate of 4.7% in the first quarter (22). Vacancy is set to rise, but with evictions banned and no one moving, the rise shouldn’t be too severe. Action by developers will also keep a lid on vacancies. MF housing starts dropped back March to a nine-month low (23). And, despite strong starts over the past couple of years, data from REIS shows only 29,000 units were completed in the first quarter, suggesting many developers are keeping apartments off the market until the disruption has passed (24.)
- REIS reported a dip in effective rental growth to 3.5% y/y in the first quarter, down from 4.6% at the start of 2019. The collapse in employment will put further downward pressure on rental growth, and we expect rental growth will slow to -1.3% y/y by the start of 2021, before recovering to 3.5% y/y by end-2022 (25).
Chart 20: Rental Household Formation (Millions)
Chart 21: NMHC Market Tightness (S.Adj., % Bal.)
Chart 22: Rental Vacancy Rates (%)
Chart 23: MF Housing Starts & Permits (000s Ann.)
Chart 24: REIS Apartment Completions (000s)
Chart 25: REIS Effective Rental Growth (% y/y)
Sources: Refinitiv, REIS, C. Bureau, NAHB, C.E.
Multifamily Market (Continued)
- Beyond a slowdown in rental growth, a further concern is that tenants will not be able to pay rent at all. After all, the unemployment rate is close to 20%, and more households reported lower than higher income compared to a year ago for the first time since early 2011 (26). But significant government support for incomes argues against a surge in arrears. For example, the extra $600 a week in unemployment insurance means most of those losing their jobs will not see a significant loss in income (27).
- Indeed, the NMHC reported that 80.2% of tenants had fully or partially paid rent in the first week of May, compared to 81.7% in May of last year (28). The economic slowdown means yields will rise. We anticipate a rise in yields from 4.1% in the first quarter of 2020 to 4.6% by the third quarter of 2020, before they gradually fall back to around 4.1% by end-2022 (29).
- That implies around a 10% fall in capital values by the end of 2020, and a total return of -5% (30). Provided the economy starts to reopen in the next couple months, a more serious downturn should be avoided. Indeed, after an initial 30% drop, the NAREIT apartment REIT index has since stabilised, and is now back to where it was just two years ago (31).
Chart 26: Income Higher than 12-Mths Ago (% Bal.)
Chart 27: Average Weekly Earnings by Industry ($)
Chart 28: Rent Fully or Partially Paid 1st Week (%)
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: 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