After a brief pause in the second half of June, record low mortgage rates helped push applications for home purchase to an 11-year high in the first week of July. That will help reverse the earlier dip in existing home sales but, with credit conditions tightening and inventory levels at record lows, sales will soon flatten out. Tight markets are however good news for the new home sector, where sales have already returned to where they were in the first half of 2019. In turn that will support housing starts, where a rise in building permits in May points to a steady recovery over the second half of the year. The shutdowns earlier in the year have pushed net absorption of rental apartments to 10-year lows. Rental growth has also slowed to 2.1% y/y and is set to turn negative later in the year.
- After a brief pause in the second half of June, record low mortgage rates helped push applications for home purchase to an 11-year high in the first week of July. That will help reverse the earlier dip in existing home sales but, with credit conditions tightening and inventory levels at record lows, sales will soon flatten out. Tight markets are however good news for the new home sector, where sales have already returned to where they were in the first half of 2019. In turn that will support housing starts, where a rise in building permits in May points to a steady recovery over the second half of the year. (See Chart 1.) The shutdowns earlier in the year have pushed net absorption of rental apartments to 10-year lows. Rental growth has also slowed to 2.1% y/y and is set to turn negative later in the year.
- Economic indicators: The easing of the lockdowns has generated a bigger rebound in spending in May and June than we were originally anticipating but, given the resurgence in coronavirus infections, the pace of recovery is likely to be slower in the second half of the year.
- Single-family: The 30-year mortgage rate dropped to another record low in the first week of July, and that helped push mortgage applications for home purchase to an 11-year high. A surge in pending home sales in May points to a decent recovery in existing home sales in June but, with inventory close to record lows, sales will soon flatten out. House price growth has slowed on the FHFA measure and is set to fall back toward 0% y/y by early 2021.
- Multifamily: Despite a large number of starts over 2019, delays due to the coronavirus have kept apartment completions low. Alongside reduced mover numbers, that has kept the increase in the vacancy rate to a minimum even as net absorption has fallen to a 10-year low. But negotiation with tenants are set to be challenging over the next few months, and the slowdown in effective rental growth seen in April and May has further to run.
Chart 1: Single-Family Housing Starts & Building Permits (000s Ann.)
Source: Census Bureau
- After falling by a cumulative 18% between February and April, as lockdowns were imposed in most states, real consumption rebounded by 8% in May (2). But the resurgence in infections, which has forced some states in the South and West to impose new restrictions on activity, will weigh on spending in July and beyond (3).
- Nevertheless, even if the recovery tails off, the rebound in May and the expectation of a further recovery in June already guarantee a decent rebound in third-quarter GDP. Following a 30% annualised decline in second-quarter GDP, we expect a 23% rebound (4). After plunging by more than 22 million in March and April as much of the country shut down, the 7.5 million rebound in employment in May and June indicates that workers are now being recalled to their jobs as lockdowns have eased (5).
- There are reasons to expect employment to rise further. Around 60% of unemployed workers reported that they were on a temporary layoff in June, rather than permanent job losers, suggesting they could eventually be recalled (6). Inflation fell sharply in the early stages of the pandemic, in part due to a slump in energy prices. But it is set to rebound over the second half of the year (7).
Chart 2: Monthly Real Consumption ($ Trillion)
Chart 3: COVID-19 Infections & Patients
Chart 4: Real GDP
Chart 5: Non-Farm Payroll Employment (Millions)
Chart 6: Unemployment Rate by Reason (%)
Chart 7: CPI Inflation (%)
Sources: Refinitiv, C.E.
- After a brief dip in late June, the surge in home purchase demand resumed in the first week of July, with applications rising to an 11-year high (8). The jump in demand will in part reflect a further fall in mortgage interest rates. At 3.26% in the first week of July, the 30-year rate reached another record low (9).
- Low interest rates and the economic recovery will support housing demand over the remainder of the year, partly offset by tighter credit conditions. Ellie Mae reported that the average FICO score for a new purchase mortgage rose to 732 in May, a six-year high, and average debt-to-income ratios have also trended down (10). Further tightening looks likely. The Q2 Mortgage Lender Sentiment survey showed that a balance of 30% of lenders planned to tighten conditions over the next three-months, a record high (11).
- The earlier surge in home purchase mortgage applications is now showing up in home sales, with a 44.3% m/m jump in the pending sales index in May pointing to a decent recovery in existing home sales in June (12). However, a lack of inventory will prevent a sustained rise in existing sales. At 1.3m in May the number of existing homes for sale was close to record lows (13).
Chart 8: 10-Yr Treasury Yield & 30-Yr Mtge Rate (%)
Chart 9: Mortgage Applications (Index)
Chart 10: Home Purchase Credit Score & DTI (S. Adj.)
Chart 11: Mortgage Lender Credit Conditions Sentiment
Chart 12: Existing & Pending Home Sales
Chart 13: Invent. SF Homes for Sale (S. Adj., 000s)
Sources: Refinitiv, MBA, NAR, C. Bureau, E. Mae, F.Mae
Single-Family Market (Continued)
- There is not much chance of a rise in inventory anytime soon. (See Update.) Thanks to a drop in price expectations, the share seeing now as a good time to sell has seen a larger fall than the share seeing now as a good time buy (14). The inventory of new homes is much healthier, which provides one reason why sales have already recovered to where they were in the first half of 2019 (15).
- The strength of new home sales has boosted homebuilder confidence, and there was a small rise in single-family building permits in May. That suggests starts will rise in June, and assuming widespread lockdowns do not return, we expect starts will rise steadily over the year (16). The FHFA reported a slowdown in monthly house price growth over March and April, which helped push the annual rate down to 5.5% (17).
- By contrast, Case-Shiller reported a further rise in growth in April to 4.7% y/y, but as it is based on an average of the past three months it is too soon to see any impact from COVID. A dip in existing home prices in May points to a drop in growth (18), but set against that mean mortgage size hit a record high at the end of June (19). (See Update.) Both of those metrics are not adjusted for quality, and overall we expect house price growth will slow to zero by early 2021.
Chart 14: Good Time to Buy & Sell (%)
Chart 15: New Home Sales (000s Ann.)
Chart 16: SF Starts & Building Permits (000s Ann.)
Chart 17: House Prices (% y/y)
Chart 18: Case-Shiller & Existing Home Prices (% y/y)
Chart 19: Mean Home Purchase App. Size ($000, S.Adj.)
Sources: Refinitiv, C. Bureau, C-Shiller, FHFA, MBA, NAR, F. Mae
- With parts of the country entering lockdown in March , it is not surprising that REIS reported a dip in the net absorption rate in the first quarter to 0.26%, a 10-year low (20). Early data point to a sharper drop in April but, with households unable to move, the vacancy rate has seen only a small rise to 4.8%. And we expect only a modest increase to around 5.5% by the end of the year (21).
- A risk to that view is the large number of MF units that have been started over the past year or so that could hit the market later in the year (22). Indeed, concerns over rising vacancy rates have led to a sharp drop in the NAHB MF production index balance (23). At 27% in the second quarter the balance is the lowest it has been since early 2010, and that points to lower MF starts over the remainder of the year.
- For units already started, construction delays caused by COVID should prevent a flood of apartments hitting the market this year. Indeed, REIS reported a sharp drop in completions in April and May (24). (See Update.) Nevertheless, the rise in vacancy we expect will put downward pressure on rental growth. As will a sharp drop in rent expectations, which implies negotiations with tenants are set to be tougher over the next few months (25).
Chart 20: REIS Net Absorption Rate (%)
Chart 21: REIS Apartment Vacancy Rate (%)
Chart 22: MF Housing Starts & Completions (000s)
Chart 23: NAHB Vacancy & Production (% Bal.)
Chart 24: REIS Apartment Completions (000s)
Chart 25: Rent Growth Expectations Next 12-Mths (%)
Sources: Refinitiv, REIS, C. Bureau, NAHB, F. Mae, C.E.
Multifamily Market (Continued)
- Indeed, according to REIS effective rental growth slowed to around 2.1% y/y in April and May (26). And we expect it will turn negative later in the year. However, as the economy recovers, rental growth will then pick-up. And, in the short term, government support to incomes has prevented a significant rise in arrears. Indeed, according to the NMHC, 77.4% of tenants had fully or partially paid their rent by the first week of July, not too far below July last year (27).
- Alongside the dip in rental growth, higher risk aversion will lead to a small rise in the NOI yield in the second half the year. But yields should drop back in 2021 (28). That implies capital values will fall by around 7.5% this year. However, we forecast they will climb by around 7% next year and a further 6% in 2022 (29).
- Low risk-free interest rates will provide some support to valuations. That said, the price of the NAREIT apartment REIT has seen only a minimal rise from its COVID related drop, even as the 10-year yield has fallen to record lows (30). Low mortgage rates have also supported the Freddie Mac Apartment Investment Market Index, which ticked-up in the first quarter (31). But, given uncertainly over a potential move away from cities, developers are set to hold-back on new developments this year.
Chart 26: Effective Rental Growth (% y/y)
Chart 27: Rent Fully or Partially Paid by First Week (%)
Chart 28: MSCI Apt. NOI Yield (%)
Chart 29: Apartment Returns Breakdown (%)
Chart 30: NAREIT Apt REIT & 10-Yr Yield
Chart 31: Freddie Mac AIMI
Sources: Refinitiv, NMHC, F.Mac, 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