National Association of Realtors releases latest report
Home sales based on contract signings have continued to decline for the second straight month – a sign that the red-hot housing market could be cooling off, according to the National Association of Realtors.
NAR's Pending Home Sales Index (PHSI), released Monday, showed a 1.8% month-over-month drop in July to a reading of 110.7. Year over year, the index was down by 8.5%.
"The market may be starting to cool slightly, but at the moment, there is not enough supply to match the demand from would-be buyers," said NAR chief economist Lawrence Yun. "That said, inventory is slowly increasing, and home shoppers should begin to see more options in the coming months."
Yun noted that homes listed for sale are still seeing strong demand, "but the multiple, frenzied offers – sometimes double-digit bids on one property – have dissipated in most regions."
He added that even in a somewhat calmer market, about 27% of homebuyers still choose to waive appraisals and inspections to speed up the home buying process.
Broken down by regions, the Northeast PHSI posted a 6.6% decline to 92, Midwest PHSI dropped 3.3% to 104.6 last month, and the South index dipped 0.9% to 130.9. Meanwhile, pending home sales in the West increased 1.9% to 99.8% in July.
Mid-month increase in forbearances
Despite the uptick, economist says there is still "opportunity for modest improvement"
The number of active forbearance plans increased once again, a typical mid-month trend, according to Black Knight's latest report.
As of August 24, there are 1.76 million borrowers who are still in pandemic-related forbearance plans, including 1.9% of GSE, 5.8% of FHA/VA, and 4.1% of portfolio-held and privately securitized mortgages.
Data from Black Knight's forbearance tracker also showed that the overall number of active forbearances rose by 12,000 over the week – driven by a 10,000 spike in portfolio/PLS loan forbearances. FHA/VA volumes posted a 3,000 increase, with GSE plans (-1,000) seeing the week's only decline.
"This puts plan volumes down 132,000 (-7%) from the same time last month," Andy Walden, economist and director of market research at Black Knight, wrote in a blog post. "More than 150,000 plans are slated for review for extension or removal through the final week of August, so there is still some opportunity for modest improvement yet this month."
The number of reviews climbed to nearly 670,000 for September, with 415,000 set to expire based on current allowable forbearance term lengths.
"How those exits manifest themselves will tell us a great deal about what we might expect for the remainder of 2021," Walden said.
The move remains contingent on certain economic factors
The Federal Reserve will start dialing back its ultra-low-rate policies this year as long as hiring continues to improve, Chair Jerome Powell said Friday, signaling the beginning of the end of the Fed's extraordinary response to the pandemic recession.
In a speech given virtually to an annual gathering of central bankers and academics, Powell said the economy had improved significantly this year, with average hiring in the past three months reaching the highest level on record for any similar period before the pandemic. Fed officials are monitoring the rapid rise in infections from the delta variant, he said, but they expect healthy job gains to continue.
The Fed has been buying $120 billion a month in mortgage and Treasury bonds to try to hold down longer-term loan rates to spur borrowing and spending. Powell's comments indicate the Fed will likely announce a reduction – or “tapering” – of those purchases sometime in the final three months of this year. Most economists expect the announcement in November, with tapering actually beginning in December.
Powell stressed that the Fed's tapering of its bond purchases does not signal that it plans anytime soon to start raising its benchmark short-term rate, which it's kept near zero since the pandemic tore through the economy in March 2020.
Rate hikes won't likely begin until the Fed has finished winding down its bond purchases, which might not occur until mid-2022. Powell said the Fed would need to see much further economic improvement before it would begin raising its key rate, which influences many consumer and business loans.
“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2% inflation on a sustainable basis,” Powell said, referring to the Fed's target inflation rate.
Inflation is much higher than 2% now, Powell acknowledged, but he underscored his view that the current price spike is temporary. He warned that history shows that raising rates too soon, in response to temporary price increases, can weaken hiring and hurt the unemployed.
Such comments bolstered the notion that the Fed is still a long way off from raising its benchmark short-term rate.
“If anything this was a calming speech,” said Brian Bethune, an economist at Boston College. “There's nothing here in the short run that will stampede interest rates higher.”
Over time, the end of the Fed's bond-buying could put upward pressure on borrowing costs for mortgages, credit cards, and business loans. As Powell spoke Friday, though, the yield on the 10-year Treasury note, which closely influences the 30-year mortgage rate, declined to 1.32% from 1.34% Thursday.
Stock investors, too, appeared to welcome Powell's message of a gradual withdrawal of the Fed's economic support and his view that surging inflation pressures will likely prove temporary. The Dow Jones Industrial Average rose a sharp 230 points, or nearly 0.7%, several hours after the Fed chair spoke.
“Markets appreciate that there is a different test for raising rates than there is for tapering, and any communications on tapering don't have any direct effect on raising rates,” said
That marks a sharp contrast with 2013, when Ben Bernanke, then the Fed chair, triggered what came to be known as the “taper tantrum” by unexpectedly suggesting that the Fed would soon reduce an earlier round of bond buys _ a remark that sent longer-term rates spiking. The jump in rates occurred partly because investors thought the beginning of a taper meant that rate hikes were close behind, which turned out not to be true.
On Friday, Powell said inflation has risen enough to meet the test of “substantial further progress” toward the Fed's goal of 2% annual inflation over time, which was necessary to begin tapering. There has also been “clear progress,” he said, toward the Fed's goal of maximum employment. He spoke via webcast to the Jackson Hole Economic Symposium, which is being held virtually for a second straight year because of COVID-19.
But Powell suggested that while inflation has surged, causing difficulties for millions of Americans, the price acceleration should ease once the economy further normalizes from the pandemic and supply shortages abate.
If the Fed were to reduce its stimulus “in response to factors that turn out to be temporary,” the Fed chair cautioned, “the ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired.”
Powell also noted that while average wages have risen, they haven't increased enough to raise fears of a “wage-price spiral,” as occurred during the ultra-high-inflation 1970s.
“Today,” he said, “we see little evidence of wage increases that might threaten excessive inflation.”
If anything, Powell said, the factors that helped keep inflation super-low for years before the pandemic – the growth of online retail, lower-cost goods from overseas, slowing population growth – could re-emerge as the pandemic fades.
Yet Powell's comments served to underscore what looks like a divide on the Fed's policymaking committee between himself, along with other officials such as Fed Governor Lael Brainard who favor patience in reversing the low-rate policies, and other policymakers who are pushing for a taper to begin soon so that a rate hike could quickly follow, if needed.
“Let's start the taper, and let's do it quickly,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said early Friday on CNBC before Powell's speech. Bostic said he expects the central bank to raise rates in late 2022 – earlier than the average among all Fed policymakers, who project the first rate hike in mid-2023.
Bostic and some of his fellow Fed regional bank presidents, including Jim Bullard of the St. Louis Fed, Robert Kaplan of the Dallas Fed and Eric Rosengren of the Boston Fed, say they worry that high inflation will persist longer than Powell appears to believe. Some of these Fed bank presidents report that business people they speak with say they're continuing to raise prices to offset their own higher costs for wages and parts.
A sharp jump in inflation has put the Fed's ultra-low-rate policies under growing scrutiny, both in Congress and among ordinary households that are paying more for food, gas, and hotel stays. Inflation, according to the Fed's preferred gauge, rose 3.6% in July compared with a year earlier, the biggest increase in three decades. The month-to-month increase, however, slowed from 0.5% to 0.3%.
Complicating the Fed's decision-making, the resurgence of the pandemic has confounded the Fed’s expectations that the economy and job market would be on a clear path to improvement by this fall. The delta variant could slow spending in such areas as air travel, restaurant meals and entertainment.
Latest MBA report delivered
New home purchase mortgage applications appear to be slowing down, according to the Mortgage Bankers Association (MBA)
Based on data from the MBA’s Builder Application Survey, the number of mortgage applications for new homes purchases dropped 4% month over month and was down 27.4% year over year on a seasonally unadjusted basis.
Joel Kan, associate vice president of economic and industry forecasting at MBA, said that the decrease is typical during summer when home sales start to moderate.
“Mortgage applications for new home purchases declined in July but did come in at the second-strongest July reading since the inception of MBA’s survey in 2012,” he said. “Furthermore, the average loan size again increased to a new record of $402,440. Homebuilders are still facing elevated building costs and accelerating home-price growth from the continued imbalance between supply and demand.”
MBA estimates new single-family home sales were running at a seasonally adjusted annual pace of 779,000 units in July, up 10.7% from the June rate of 704,000 units. Unadjusted, there were 64,000 new home sales in July, a 3% drop from 66,000 new home sales in June.
“After adjusting for seasonal patterns, our estimate of annualized new home sales showed a jump of more than 10% from June,” Kan said. “The housing market is still extremely competitive, and prospective buyers have increasingly turned to newly built homes because for-sale inventories remain so low.”
By product type, conventional loans composed 73.8% of loan applications, FHA loans composed 14.6%, RHS/USDA loans composed 0.8%, and VA loans composed 10.8%. The average loan size of new homes increased from $392,370 in June to $402,440 in July
“Buyers are pushing back”
With home buying conditions slightly improving in the past few months, red-hot bidding wars simmered down to a seven-month low in July.
Redfin reported that 60.1% of home offers written by its agents faced competition, down from a revised rate of 66.5% in June, and a pandemic peak of 74.1% in April. While July’s bidding-war rate was the lowest since January, it’s still higher than the 57.9% bidding-war rate in the same period a year ago.
After months of fierce competition, market conditions continued to normalize as sky-high prices moderated amid an increase in housing supply. However, Redfin noted that competition also tends to ease in the summer after the spring home buying season, so seasonality is another factor at play.
“Competition has started to slow in the last three weeks. We’re now seeing five to eight offers on homes instead of 25, and they’re coming in $5,000 to $10,000 above the listing price instead of $50,000 to $60,000,” said Scott Mercer, a Redfin real estate agent in Sacramento, Calif. “Buyers are pushing back. They’ve even started including appraisal contingencies again and making requests for repairs—things that were pretty much unheard of last year.”
Fort Collins and Orlando were two of the most competitive markets in July. The bidding war rate in Fort Collins was 77.3%, and 77% of offers in Orlando faced competition during the month. Nashville (74.6%), Honolulu (74.1%), and Colorado (73.2%) rounded out the top five metros with the highest bidding war rates.
Sacramento’s – the third-most-popular migration destination in the second quarter – bidding war rate dropped from 77.2% in June to 72.9% in July. Mercer said that the slowdown in Sacramento was mainly driven by the migration of tech workers from the Bay Area.
“Sacramento exploded in popularity among remote workers during the pandemic. People coming from San Francisco were like kids in a candy store here because home prices were so inexpensive in comparison. But we’re no longer seeing as big of an influx of those folks, likely because families can finally travel again, and employers are asking people to come back to the office. It will be interesting to see if migration to Sacramento rebounds if the COVID situation continues to worsen,” Mercer said.
Mortgage lenders tighten standards
But despite the ongoing economic recovery, credit supply remains low
Mortgage credit supply increased slightly in July, driven by an uptick in jumbo loan programs.
The Mortgage Bankers Association’s Mortgage Credit Availability Index (MCAI) was up 0.3% to 119.1 in July, indicating lending standards tightened a little compared to June. The index was benchmarked to 100 in March 2012.
“The overall gain was despite another month of pullbacks in high-LTV refinance programs due to GSE policy changes,” said Joel Kan, AVP of economic and industry forecasting at MBA. “The elimination of more high-LTV refinance loans drove most of the 3% drop in the conforming index, but that was somewhat offset by lenders adding new refinance loan programs to help qualified, lower-income GSE borrowers. The bounce back in jumbo credit availability followed a sharp drop in June, as some investors renewed their interest in jumbo ARM loans for cash-out refinances and investment homes.”
The Conventional MCAI grew 0.8%, while the Government MCAI remained unchanged. Of the component indices of the Conventional MCAI, the Jumbo MCAI rose by 3.8%, and the Conforming MCAI dropped by 3.2%.
“Even as the economic recovery is underway, overall credit supply has remained close to its lowest levels since 2014. Some borrowers are still in pandemic-related forbearance status, and servicers continue to work through possible resolutions for these borrowers,” Kan said.
Report reveals strong appetite for REIT and CRE investing
Continued economic recovery is fueling investors’ appetite for commercial space, according to the Nareit T-Tracker report released Thursday.
Earnings of all equity REITs, measured as funds from operations (FFO), grew 19.8% from the first quarter to $16.5 billion in the second quarter – a sign that the FFO of the REIT sector as a whole has fully recovered from pandemic-lows.
“REITs and commercial real estate are experiencing a more complete recovery as the economic reopening continues,” said Nareit senior economist Calvin Schnure. “While the Delta variant raises risks of slower improvement ahead, robust economic growth is spurring demand for commercial space.”
According to the report, about two-thirds of all REITs reported higher FFO in Q2 than a year ago. The retail sector’s FFO rose for the fourth straight quarter in Q2, up 21.4% from Q1. By property types, regional malls saw the largest FFO gain, up 32.5% quarter over quarter to $1.4 billion. Free-standing retail FFO ($806 million) and shopping centers FF0 ($1.03 billion) increased 22.4% and 7.9% during the quarter.
Other sectors heavily hit by the pandemic have also experienced earnings recovery. FFO of lodging/resort REITs increased to $67 million in Q2 after four consecutive quarters of negative FFO, while office REITs increased 37.7% to $2 billion, surpassing pre-pandemic highs. Diversified REITs reported a 20.8% increase in FFO, up to $575 million.
“Real estate sectors supporting the digital economy maintained their strong performance as demand for technology-based commerce and communications continued to grow even as COVID-19 restrictions lift,” Nareit stated in the report.
FFO for the data center sector held steady at a record high of $1.1 billion. Meanwhile, FFO for the infrastructure sector jumped 20.8% to $2.2 billion, and FFO for the industrial sector climbed 11.3% to $1.6 billion.
Overall, occupancy rates have recovered more than two-thirds of the decline from pre-pandemic levels, up 180 bps to 92.5% in the second quarter. In addition, REITs made net acquisitions of $16.3 billion, the highest quarterly total since the second quarter of 2015.
Affordability for first-time buyers is weakening
US home prices rose the most on record in the second quarter as buyers battled for a scarcity of listings.
The median price of an existing single-family home jumped 23% from a year earlier to an all-time high of $357,900, the National Association of Realtors said in a report Thursday. About 94% of 183 metropolitan areas measured had double-digit gains, up from 89% in the first quarter.
Low mortgage rates have stoked the hot US housing market for more than a year, with a shortage of inventory pushing prices ever higher. Buyers are having a hard time finding properties they can afford: Sales of previously owned homes in the US fell for a fourth straight month in May.
“Home price gains and the accompanying housing wealth accumulation have been spectacular over the past year, but are unlikely to be repeated in 2022,” Lawrence Yun, chief economist for the Realtors group, said in the report. “There are signs of more supply reaching the market and some tapering of demand.”
The Northeast region led gains, with a 22% rise. Among metro areas, values rose the most in Pittsfield, a Western Massachusetts town about 40 miles (64 kilometers) from Albany, New York. The median price there was $321,900, up 47% from a year earlier. It was one of 12 areas nationwide with increases of more than 30%.
The only metro area with a decrease was Springfield, Illinois, where prices fell 7%.
The price increases have hit particularly hard for renters looking to become homeowners. Among first-time buyers, the monthly mortgage payment for a loan with 10% down jumped to 25% of income in the second quarter, up from 21% a year earlier, according to the report.
“Housing affordability for first-time buyers is weakening,” Yun said. “Unfortunately, the benefits of historically low interest rates are overwhelmed by home prices rising too fast.”
Report predicts record-breaking rent increases to be the norm by year-end
National multifamily rent growth rose 1.56% from May to June – nearly double the record 0.88% month-over-month gain seen between April and June, according to Yardi Matrix’s latest report.
“Rent increases have broadly accelerated more quickly than anticipated, and, as such, our forecasts have largely been adjusted upwards during the short term,” Andrew Semmes, senior research analyst at Yardi Matrix, said in the report.
“Record-breaking rent increases will be the norm across metros by the end of the year, but our longer-term outlook remains largely unchanged. In short—market fundamentals are good, and the strengthening jobs market should support continued longer-term rent growth.”
Data from Yardi’s showed that the rapid growth in multifamily rents was mainly driven by increases in higher-end buildings.
For the May to June period, lifestyle apartment buildings classified as “upper mid-range” increased by an average of 7% since the beginning of the year – more than double the increase seen in the lower tiers (3%).
While workforce housing is not seeing such rent jumps, Yardi said that upward pressure on lower-end wages should provide strong support for continued gains in Class B and C housing as the pandemic recovery continues.
“The delta variant, unfortunately, has the potential to upend individual markets, but with full FDA approval of vaccines expected as early as next month, we should see higher vaccination rates and lower risk of another large negative shock,” Semmes added.
Homebuyers continue to suffer as surging construction prices topple records
Given the ever-increasing challenges caused by soaring material costs and low supply, housing affordability is now at its lowest level in nearly a decade.
During the second quarter, 56.6% of new and existing homes sold were affordable to families earning the median income of $79,900. This is down from the 63.1% of homes sold in the previous quarter and the lowest affordability level since 2012, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) released Thursday.
“Runaway construction cost growth, such as ongoing elevated prices for oriented strand board that has skyrocketed by nearly 500% since January 2020, continues to put upward pressure on home prices,” said NAHB chairman Chuck Fowke.
The HOI revealed that the national median skyrocketed to a record $350,000 in Q2 from just $30,000 in Q1 – the largest quarterly price hike in the history of the series.
NAHB chief economist Robert Dietz also pointed out that higher lumber costs have added nearly $30,000 to the price of an average new single-family home and raised the rental price of a new apartment unit by more than $90.
Pittsburgh, Pa., was the nation’s most affordable major housing market (defined as a metro with a population of at least 500,000) during the second quarter. Over 90% of all new and existing homes sold in Q2 were affordable to families earning the area’s median income of $84,800.
Meanwhile, Los Angeles-Long Beach-Glendale, Calif., remained the nation’s least affordable major housing market for the third consecutive quarter. Only 8.4% of the homes sold there during the second quarter were affordable to families earning the area’s median income of $78,700.
“Policymakers must address supply chain bottlenecks for building materials that are raising costs and harming housing affordability,” Fowke said
“With the US housing market more than one million homes short of what is needed to meet the nation’s demand, policymakers need to focus on supply-side solutions that will enable builders to increase housing production and rein in rising home prices,” Dietz said.