On this month’s episode of “Monday with Matthew,” Windermere’s Chief Economist Matthew Gardner digs into mortgage rates, new construction, and condominium sales.

Hello there and welcome to the April edition of Mondays with Matthew. I’m Windermere Real Estate’s Chief Economist, Matthew Gardner

There were a lot of rich, housing-related datasets released this month so let’s get going.

And first up, I want to look at mortgage applications.

You may remember last month we discussed what was going on with mortgage rates as they had started to trend higher beginning in the New Year. Well, as rates rose, you can see here that mortgage applications slowed before picking back up in at the end of February, which was interesting as rates were still rising at that time.

And for those who find it curious that applications picked up even as rates were rising, well it was partly because buyers started to believe that rates would not be headed back down, and they wanted to get locked in for fear that they would continue trending higher.

Now, this pattern did reverse at the end of March as rising rates started to take a toll on would be buyers and affordability issues started to come more into play, but as mortgage rates pulled back in April, applications picked up again – albeit modestly.

But when we take a look at the data on a year-over-year basis.  Well, WOW!

Applications were up by over 58%! But remember what happened in March of last year? Who can forget….?

And its therefore really not surprising to see this kind of spike, but, I would caution you all that almost any dataset that compares current numbers to those seen a year ago – well, they are likely to paint far too rosy a picture, and one that is removed from reality.

Something to be aware of.

 

Next up, we got several datasets regarding the new home market March and we will start off with permits and starts.

Following the pullback in permit applications that was seen in February, builders were more optimistic in March with single family permits up by 4.6% on the month and 35.6% higher than a year ago – but don’t forget what we just said about year over year data!

Looking at housing starts – well they pulled back in January and February, but also saw a solid 15% monthly increase in March.

Interestingly, there was a massive spike in starts in the mid-west where they were up by 109% month-over-month, but they were actually down by over 12% out here in the west.

I would also let you know that the number of homes under construction rose by 1.6% versus February and this was particularly pleasing given that construction costs remain very elevated.

And it hasn’t just been material costs that have been hitting home builders, they have also seen significant pressures with labor costs and here’s why…

This chart shows how many people are employed in the construction of single-family homes and, at face value, it looks pretty good with constant growth seen since 2012 – of course, ignoring the impact of the pandemic but….

Looking at a longer timeline, it doesn’t paint as good a picture. At its peak in 2006, there were almost 650,000 people employed building homes, but the number today is just 60% of that.

Of course, there are fewer homes being started today than there were back in those halcyon days but starts today aren’t 40% lower, so the job market remains tight. In fact, there are over 260,000 job openings in the construction sector. Of course, not all of them are for the single-family construction market, but we do know that builder’s cost of labor is rising and that, in concert with higher land and material costs continue to impact builder’s ability to bring homes to market that are relatively affordable as the increase in costs is transferred directly into the price that a home must sell for and that brings me to data on new home listings, sales and prices in March.

Even with new housing permits and starts rising significantly the seasonally adjusted estimate of new houses for sale at the end of March was 307,000. This represents a supply of 3.6 months at the current sales rate.

The number of new homes for sale was down by 7% from a year ago, but I do expect that the increase in permits and starts bodes well for this arena, and I do expect to see more listings come online over time.

If you look at the chart to the right, you will notice that the number of homes for sale that have yet to be started continues to rise. This is because builders want some certainty that the home will be sold, and it’s, therefore, easier to sell before you build it.

And when we look at sales, well they rise by 20.7% in March to an annual rate of over 1 million units and clearly rebounded from the previous month when we saw a massive drop as severe winter storms wreaked havoc across much of the country.

Interestingly, you will see that as many homes sold that hadn’t yet started as were under construction. Clearly, demand is robust to the degree that buyers willing to commit to buying a home that hasn’t yet been built.

The median new home sale price came in at $330,800 – that’s down by 4.4% on the month but 0.8% higher than a year ago.

OK – now we have covered the new home market, let’s take a look at how the resale market fared in March.

The number of homes for sale remains at almost historically low levels with marginally more than 1 million units on the market. Now there maybe some of you out there who say that is inaccurate as NAR is reporting 1.07 million homes for sale, and you’d be absolutely correct.  But I have adjusted the data to account for seasonality, so it is slightly different.

Anyway, with such limited choice across the country, it wasn’t a surprise to see sales pulling back, with the total number of closings running at an annual rate of 6 million units – that’s down by 3.7% month over month, and down by 12.3% when compared to March of 2020.

Am I worried about this? No, I am not. Why? Well, as I just mentioned, just look at the inventory numbers.  With little choice, it’s not at all surprising to see sales pull back but I would add that the market still hit 6 million transactions and that was in the face of the increase in mortgage rates that we saw last month so, to tell you the truth, I was actually a little surprised to see that the number held above that 6 million level.

But even as sales pulled back a little, prices didn’t, and more records were broken with the median sale price hitting an all-time high, and year-over-year price growth above 17% was another record shattered.

And if you need further proof that there is little to be concerned about when it comes to sales pulling back, you only need to look at these charts.  Low supply, but still very robust demand has months of supply at levels that indicate a highly unbalanced market. Nationally, I like to see somewhere between 4 and 6 months of supply, not 2.1…

But look at the right. For every offer accepted in March, there were 3.8 additional offers, and I would also tell you that the average length of time it took to sell a home in March was just 18 days and that’s down by one day from February but down by eleven days when compared to a year ago.

Surely if demand was waning, wouldn’t the number of offers be going down, and days on market going up?

And when we separate out the single-family market, you can see that listings notched very slightly higher – up by 1.2%, but the level is still close to an all-time low with listings down by over 31% year over year.

As far as sales are concerned, well they also pulled back a little and were down by 1.3% versus February but were 14% higher year over year.

And as we discussed earlier, even with lower sales activity, sale prices are still rising at a very rapid pace and are now over 18% higher than seen a year ago and a remarkable 6.2% higher than seen in February.

The median price also broke above $330,000 for the first time.

Moving on to the condominium market, we saw listings rise as the pandemic took hold, and there were concerns back then that we were at the start of a systemic increase in listings with people fleeing cities over fears of COVID-19, as well as the ability to work remotely, but the increase soon wore off, even if it rise by 9% in March when compared to February, but there were 5.1% fewer listings than seen a year ago.

But on the sales front – and with listings rising – we saw demand for those homes with sales up by 5% versus February and 36.4% higher than seen in March of 2020.

In a similar fashion to single-family prices, sale prices for condominium units saw a spike in price in March and were up by 4.9% versus February and almost 10% higher than seen a year ago.

Although you will see that annual sale price growth did turn negative last May – due to COVID – it is actually rare to see this. We did see a tiny drop back in 2018 but you will likely remember that mortgage rates were rising then and knocking on the door of 5%.

Anyway, since last May, sale prices have picked back up very nicely and worries of any significant drop in condo prices appear to be overblown.

As far as the ownership market is concerned, I am far less worried that mortgage rates have been ticking higher than I am that there are just not enough homes for sale to meet demand.

We had seen some growth in the new construction arena – and that took just a tiny bit of heat off the resale arena – but demand continues to exceed supply, and that is pushing prices higher and affordability issues have already started to appear in several markets across the country.

At some point, we will see price growth slow, but I think that it will be far more to do with affordability limitations than it will rising mortgage rates.

So, there you have it. My thoughts on the housing market in March.

As always, if you have any questions or comments about the numbers, we have looked at today, feel free to reach out. I would love to hear from you.

In the meantime, thank you for watching, stay safe out there, and I look forward to visiting with you again, next month.

Bye now.

1. Economic Growth Will Pick up – But Not Until the Summer

As you are all aware, the job recovery has slowed significantly over the past few months and the December number – which saw employment levels actually drop by 140,000 jobs – was really quite appalling.

But… as bad as the numbers were last month, I am still expecting to see solid employment gains this year.

That said, I don’t see significant improvement until the vaccine starts to be distributed widely AND a majority of us choose to take it.

And when we get to that point – likely in the second half of this year – look for a lot more jobs to be added across the country, but employment levels will rise for a reason that most people aren’t thinking about, and it’s because I believe that the public – as they feel more comfortable going out – will start
to spend again.

In fact, it’s my forecast that spending will rise very significantly later this year and that will give a much-needed boost to the economy and the job market.

You see, we haven’t been spending our hard-earned dollars at normal levels for almost a year now and, quite frankly, the cash that we have been hoarding since the pandemic started is starting to burn a hole in our pockets.

So, my number 1 prediction is that we will see significant economic growth– and job gains – this year, but that most of the growth will come in the second half of 2021

2. The Move to the Suburbs is Real – But Don’t Get Carried Away! Looking now at the housing market, there’s been a lot of talk about a COVID-19 induced flight away from cities and into the countryside.

Well, the numbers don’t lie – there have certainly been more interest from buyers looking at markets outside of our core metros and this – obviously – is a function of the work-from-home phenomenon that I believe is not a flash in the pan, rather it is real and will be in place for a long time, if not forever.

But there is a bit of a wrinkle in this theory. In as much as we are certainly seeing suburban flight from markets like New York and San Francisco, the same can’t be said for much of the rest of the country.

In fact, according to a study recently published by Lending Tree, the percentage of owners who moved out of the top 50 largest metro areas in the country in 2020 was just 2.2% – now this is up from 1.9% in 2019 – but it’s hardly the tsunami that many had anticipated. And it’s also worth mentioning that some of the markets within Windermere’s footprint actually saw a net increase of migrating homeowners and not a drop. Examples of this include Denver which saw the number of households moving in up by 3.6% in 2020; Portland was up by 3.4%; Seattle by 3.3%; and Sacramento saw an in-migration rise by 2.9%. Although some households will move because work from home allows them to relocate to cheaper markets, it doesn’t mean that we are all headed out to the wild blue yonder.

In fact, I believe that – even though a good number of households will move – many will stay within striking distance of their workplaces, and I say this because I expect the work from home concept to be one where we work part-time from our homes, and part-time at our offices.

My number 2 forecast is that although people will move away from some of our core cities this year, many will still stay in the same region as work from home will not be a full-time situation for a majority of workers.

3. Not all Apartment Markets are Created Equal

The apartment market has been hit very hard by COVID-19 with rising vacancy rates putting significant downward pressure on rents in many large markets such as Seattle, San Francisco, Boston, and New York but guess what? We are actually seeing rents still rising in many smaller cities and these include Boise, Fresno, and Tucson, Arizona.

And this move away from expensive apartment markets is occurring for several reasons not least of which is – again – work from home, but it’s also due to an increasing number of renters turning into home buyers, and it’s also because the rent premium for being “close to the action” in major cities has faded and, because of this, I see previously overlooked suburbs and
small metros benefitting from growing demand.

2021 will be a tough year for many landlords in larger cities not just for the reasons I have already mentioned, but also because we are bringing on over 400,000 new apartment units across the country this year and many new developments are in these larger cities.

Number three forecast – Apartment owners in pricy markets will continue to suffer in 2021, but smaller markets will perform rather well and – after many years of being overlooked – I am also forecasting those apartment developers will start to turn their attention toward suburban markets and away from many of these larger cities. We haven’t seen that in over a decade.

4. The Luxury Housing Market Will Continue to Perform Very Well

One of the sectors that really performed far better than anyone – including me – had anticipated in 2020 was the luxury housing market, and I expect this sector to be very robust again this year and the reason for this, primarily, will be interest rates. Jumbo mortgage rates, which saw a spike at the start of the pandemic, have since dropped significantly and this is benefitting buyers of luxury housing.

Buyers of luxury housing will be very active this year and I see many focusing on some secondary markets – for value reasons – but I still expect that the classic luxury markets, like the Hamptons for example, will also do very well.

Other markets where the luxury sector will outperform are Miami – but this will be mainly due to tax changes in New York City driving owners to relocate – and I’m also watching Southern California and predict that luxury homes down there will also outperform this year.

One more thing I would mention is that I also expect that, as the country starts to reopen post-COVID, we will see a rebound in foreign buyers as well so keep an eye on that too.

Forecast number 4 – the luxury market will be more robust in 2021 than many had anticipated.

5. Cities will Start to Pay More Attention to Zoning (at Long Last!)

Many of you will be more than aware of my ongoing concerns regarding housing affordability. Now, we have seen some cities like Minneapolis, and even some States – and here I’m talking about Oregon – start implementing significant zoning changes to allow for more new home development in their markets which is impressive, but it certainly isn’t happening everywhere.

However, I believe that this year we will – at long last – start to see more attention from legislators when it comes to increasing the supply of land for residential construction and many will do this by adjusting current zoning policies to allow more land on which to build.

So why this new focus? Well, their attention will be driven by worries that high housing costs in their own markets may lead businesses to start to look at cheaper areas and – possibly – move away from their current locations, and other businesses that are thinking about expanding into new markets – well, they will be increasingly thoughtful about how housing costs in expansion markets will impact how much they have to pay their new employees.

You see, we know that almost every jurisdiction across the country is suffering from significant shortfalls in revenue and, because of this, legislators will have to start focusing on attracting new businesses – and retaining as many businesses as possible – in order to help replenish their coffers.

Forecast Number 5 – Although it won’t happen overnight, I am hopeful that discussions around zoning changes will start to pick up some steam this year.

6. Adaptive Reuse Will Gain More Traction

Over the past several months, many of you have asked me whether we will see office buildings converted to residential uses as there will be fewer workers occupying offices. Well, I am sticking to my belief that the cost of conversion and the layout of office buildings (primarily due to core depths, lack of plumbing penetration, and the like) just don’t lend themselves to conversion to residential uses – well, that is unless you buy them at bankruptcy prices!

That said, I am expecting to see other building types that may be better suited for conversion into either single residential use or a mix of uses, start to become attractive to developers.

And what are these other product types, you ask? Well, likely unsurprising to you is that I am looking at hotels – which are going to continue to be hard hit for, in my opinion, years… and retail malls – both strip as well as regional.

You see, we are already seeing more hotels – mainly inns and motels – be listed for sale as they are just not providing adequate cash flow and I expect
that some, but not all, may become ripe for conversion into residential uses.

As far as malls are concerned, look for more interest in the conversion of regional malls into mixed-use projects, but strip malls may get rezoned into single residential uses.

Number 6 – developers will start to pay more attention to the reuse of existing buildings in addition to ground-up construction.

7. What’s important in a post-COVID-19 home?

The pandemic has started to change what we are looking for in a home and it’s actually very interesting to see what is now becoming important to buyers. We know that work from home is real, but I see households moving not just because housing is relatively cheap further out, but many will look at their own homes – even if they are on the fence about moving – and realize that it’s just not set up for working remotely on a semi-permanent, or permanent, basis.

How many people do you know who have spent the past several months working from their dining room tables? I’m one!

But I also expect to see sellers who may not have an office in their homes, create dedicated spaces for an office set up to attract buyers or, where they just can’t do that, they will, at a minimum, create a dedicated Zoom space before listing their homes for sale!

I am also forecasting that you will also see new construction housing reflect these changes with builders better aligning their product with new consumer preferences and that demand for new homes will rise in 2021 as builders address these new requirements from buyers.

People want more space today because they are using their homes more and I already see builders addressing this with the average new home size rising last year following several years where new homes were actually getting smaller.

Also, when it comes to new construction, open floor plans — once a must — well they will be replaced too thanks to COVID-19 and buyers wanting more room separation.

And finally, I expect buyers who are looking to move a lot further out to become far more interested in markets that have high-speed internet access. Many of us take it for granted, but buyers will start to list this as a requirement, rather than an option – again possibly limiting moves too far out into the country.

Forecast Number 7 – Home preferences are changing – builders are already adapting, and owners of existing homes will have to do what they can to meet these new requirements.

8. Worries About Forbearance are Overblown.

Since last spring, a question that I have fielded probably more than any other, has revolved around the topic of forbearance.

The GSE’s have extended the forbearance program to the end of March so some of the pressure has been removed, but there are a lot of people who fear that – when forbearance expires – we will see a veritable tsunami of foreclosed homes come online and this massive increase in supply will lead to all homes seeing values drop.

Well, it won’t happen, and here’s why.

First off, the number of homes in forbearance is already down by 43% from its May peak. Even though it is true that the pace of the drop in the number of homes in the program has slowed, the trend is still headed in the right direction.

Yes, there are still 2.7 million homes in the program, but I believe that, as owners start to get back to work again, many will be able to either refinance their loans or work with their lenders to extend the term of their mortgages in order to make up missed payments and most will not end up in foreclosure.

I would also add many owners in the program – if they just can’t get back on track – will sell in order to keep the equity that they have built over the last few years and, in most areas, there will be enough buyer demand and they will be able to get out from under forbearance by selling and paying off the mortgage and missed payments that way.

Of course, we will see foreclosures rise this year, but I just don’t see the majority of owners in forbearance be forced into foreclosure and that will limit the downside risk to the housing market.

That said, I am a little more worried by condominium owners who are in forbearance as the supply of these homes is already on the rise and this is causing prices to soften relative to single-family homes.

This is not a phenomenon spread broadly across the country, but many markets are seeing condo price growth slow and some – here I am looking specifically at Queens in New York, Suffolk County in Boston, and in San Francisco County – are seeing real price declines and I do expect to see a greater share of condos end up in foreclosure, but a far smaller share of single-family housing will suffer the same fate.

And I must add that not all market areas are created equal. Today, total delinquency rates are very high in states like Mississippi, Louisiana, New York & Oklahoma, but here in the western US they are significantly lower.

Interestingly, when I looked at Windermere’s footprint, I am delighted to report that the States with the lowest rate of non-performing mortgage include Idaho, here in Washington State, Colorado, Oregon, and Montana.

So forecast number 8 – I do not anticipate a wave of foreclosures following the end of forbearance, and that the foreclosures that do occur will have a limited impact on the broader ownership housing market.

9. Mortgage Rates Will Rise – But Don’t Worry

Rates for 30-year conforming mortgages have broken below all-time lows 16 times since the pandemic started. Really remarkable with the average 30-year rate at the time of recording this video standing at 2.65% and rates down by over a full percentage point over the past year and that, naturally, has allowed prices to continue rising at above-average rates, but going forward I just don’t see them dropping much more, and I believe that we have, at least for now, reached a floor when it comes to rates.

Without getting too academic, the reason I say this is that mortgage rates track the interest rate on 10-year treasuries – or at least they should – but that relationship broke back in February – because of the pandemic. However, treasury yields have started to rise again, and that relationship is now back in line which tells me that rates are unlikely to drop much further – all things being equal.

Prediction number 9 – mortgage rates are unlikely to drop much more, but don’t anticipate them rising too much with this year averaging around 3.1%. Still very competitive.

10. US Home Sales Will Rise Significantly, but Price Growth Will Moderate

Finally, I just have to talk about home sales and prices even if I did cover this in my last forecast. Given all the factors I have already talked already, we will see more demand from buyers this year, and I also expect to see listings actually increase as people look to relocate, and this will lead sales in 2021 to rise to a level we haven’t seen since 2006!

And big players in the housing market as far as buyers are concerned will be renters turning into home buyers and I would add that we could see first-time buyers make up an even bigger share of the market if the Biden Administrations goal to introduce a new first-time buyer tax credit gets enacted – but that is certainly not a given.

Overall, existing home sales will rise by 7.7% in 2021 to around 6.2 million units.

As for prices, well I see them increasing again this year but, as I just mentioned, mortgage rates will start to move modestly higher and this will be a bit of a headwind to price growth, and affordability constraints will also start to slow appreciation in expensive housing markets. This year I am looking for average prices to rise by a relatively modest 4.1%.

My final forecast – home sales will rise significantly this year, but price growth will moderate.