October Market Update: An Optimistic Outlook for Real Estate

October 14, 2020

In an unprecedented year filled with economic turbulence and uncertainty, the U.S. real estate market continues to rebound and maintain its upward trajectory. Read on for relevant national housing and economic insights, courtesy of KW’s in-house research team. 

When you’re finished, make sure to review your local MLS for the most accurate picture of the market, so you can help your clients navigate the current landscape with confidence. For a larger, more comprehensive outlook, dive into Gary Keller’s market update, delivered in September.

U.S. Economy Highlights

  • Several recent data releases point to signs of a slowing pace of economic recovery. Employment figures, manufacturing indices, as well as income and spending statistics all show a slowing pace of recovery in August and September. 
  • The economy added only 661,000 jobs in September, and the unemployment rate declined to 7.9% from 8.4% in August. There are still 9.65 million fewer jobs now than at the same time last year.
  • Currently, the Federal Reserve projects the economy to decline by 3.7% in 2020. Jobless claims remain elevated and have shown little progress over the past four weeks. Industrial production measures show continued progress on a monthly basis but remain down by double digits compared to the previous year.
  • The real estate market has continued to accelerate, as mortgage rates and inventory both hover near all-time lows. New data from the Mortgage Bankers Association shows that purchase applications for mortgages are trending well above the previous year, and we expect home sales to continue to rise against the backdrop of historically high unemployment in Q4.

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An Optimistic Outlook for Real Estate

  • U.S. existing home sales reached the fastest sales pace since 2006 in August, as sales climbed to a seasonally adjusted annual rate of 6 million. This was a 10.5% increase compared to August 2019. Inventory remains extremely low at 3 months of supply and overall listings are down 19% compared to August 2019. 
  • Home prices continue to accelerate now, rising at a double-digit pace, with median home prices up 11.4% year over year. Low inventory may start to slow home sales as we move into Q4. As of October 9, year-to-date sales were down only 3.2% compared to 2019.
  • NAR pending home sales were up 8.8% in August, indicating continued acceleration in sales in September and October.
  • New home sales were up 43% year over year in August, as low mortgage rates and low inventory of existing homes combined with remote work to put new homes in high demand. This was above the consensus forecast and the fastest pace since 2006.
  • New single-family home starts rose to a seasonally adjusted, annualized rate of 1,021,000 in August, up 4.1% from July and up 12% from last August. New home sales have been surging and are driving new construction. They are reported at contract, which typically occurs before the start of construction and therefore is a leading indicator. Low rates and changes in housing preferences driven by the pandemic and remote work are likely driving the surge. 
  • The NAHB builder confidence index reached an all-time high for the second month in a row in September. Monthly private residential-construction spending rose to a seasonally adjusted annualized rate of $589.4 billion in August, up 6.7% from the prior year.
  • A new report from the Mortgage Bankers Association showed that 8.2% of mortgages were delinquent in Q2. The 4% jump from the prior quarter is the biggest quarterly gain in the survey’s history. Q2 represents the highest level of delinquencies in nine years. The delinquency rate for FHA mortgages surged to 16% in Q2, an all-time high. Although these numbers indicate the extent of the problem facing the housing industry, they are not immediately dire, as many of these mortgages are in forbearance. The hope is that we should see this number decline as loans move out of forbearance and are restructured. Still, if unemployment remains high – or worse, moves higher – some of these homeowners may not be able to restructure their loans and may be forced to sell.
  • As of October 6, apartment rent payments for October were unchanged compared to the same period last year, according to the National Multifamily Housing Council. The NMHC’s rent tracker shows that 79.4% of apartment households have made full or partial rent payments for October and is actually up slightly from the 76.4% who had made such payments by September 6. A recent study shows that Las Vegas and New Orleans led the country in missed September rent payments. This report further highlights the uneven impact of pandemic-related unemployment as both of those cities are highly dependent on the hard-hit tourism and hospitality sectors. As a result, unemployment is higher in both cities, leading to more missed rent payments.
  • Mortgage purchase applications for the week ending October 2 increased 2% from the previous week and are up 21% compared to the same week the prior year, according to the Mortgage Bankers Association. Purchase applications have now been tracking above the prior year’s rate for 20 consecutive weeks. The MBA’s refinance index jumped 8% from the prior week, hitting its highest level since mid-August. Refinance loans are currently about two-thirds of total mortgage activity.
  • The share of mortgages in forbearance fell to 6.8% of mortgages (down just 6 basis points from the prior week) or about 3.4 million homes according to the Mortgage Bankers Association. Of the mortgages still in forbearance, 28.5% of these loans are in the initial stage of forbearance and 70.1% are in extensions. The remaining 1.4% are loans that exited and re-entered forbearance. As the first group of loans to enter forbearance begin to hit the end of their six-month term in the next few weeks, we may see some changes in these numbers.

Public Policy Updates

As the COVID-19 lockdowns shut down much of the economy earlier this year, the government extended business loans under the Paycheck Protection Program (PPP) to keep businesses afloat. These loans were meant to be forgivable, so long as certain conditions were met. The Small Business Administration (SBA) has now started the forgiveness program, and any real estate businesses that participated in the program need to apply for forgiveness, if applicable.

  • According to the SBA, the agency began approving forgiveness applications and remitting forgiveness payments to PPP lenders and borrowers on October 2. The SBA updated its FAQS for lenders and borrowers earlier last week. 
  • On October 8, the SBA announced the release of a new, simplified forgiveness application for PPP borrowers with loans of $50,000 or less. The new application – Form 3508S – is one-and-a-half pages long and requires the borrower to certify that the amount they are seeking forgiveness for was spent in accordance with the PPP requirements. Documentation must be submitted to their lender confirming payroll costs, employee numbers, business mortgage interest payments, rent, and utility costs for the covered period.

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