Despite being a lagging economic indicator, housing data across the U.S. points to a robust and healthy real estate industry. Is the pain for real estate still ahead of us, or is housing poised to help lead a V-shaped economic recovery?
Increased demand, low supply, low mortgage rates, increasing prices, as well as positive industry sentiment all point to the latter scenario. Here's an overview of the positive economic and demographic tailwinds that are poised to help the real estate sector lead in an economic recovery.
To start, housing sentiment has been on the rise over the last month. The Fannie Mae Home Purchase Sentiment Index (HPSI) increased 4.5 points in May 2020, to 67.5, after hitting all-time lows in April.
Doug Duncan, Chief Economist at Fannie Mae, notes, "Although weakened income perceptions and continuing job loss concerns, particularly among renters, are likely weighing on many would-be buyers, purchase mortgage applications have returned to mid-March levels when pandemic response measures began ramping up."
According to the National Association of Home Builders (NAHB), the sentiment among the home construction industry surged 28 points between April and May 2020 to a reading of 58. Anything above 50, NAHB notes, is indicative of a positive market.
NAHB Chairman Dean Mon commented that "as the nation reopens, housing is well-positioned to lead the economy forward. Inventory is tight, mortgage applications are increasing, interest rates are low, and confidence is rising. And buyer traffic more than doubled in one month even as builders report growing online and phone inquiries stemming from the outbreak."
Demand remains strong
According to the latest numbers from the Mortgage Bankers Association (MBA), mortgage applications are up 8% from this time last week, showing strong demand for loans despite the ongoing economic uncertainty. Further, refinances are up 10% from last week and up over 100% from this time last year, according to the MBA.
Joel Kan, the MBA's Associate Vice President of Economic and Industry Forecasting, comments on this data, stating that "Purchase applications increased to the highest level in over 11 years and for the ninth consecutive week. The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence."
According to new data from Redfin (NASDAQ: RDFN), housing demand is now 25% higher than pre-pandemic levels in January-February. Bidding wars are continuing, and sale prices are up 3.1%, with asking prices up 9.9% since January-February. According to Glenn Kelman, Redfin's CEO, "It seems that nothing can deter homebuyers. Seasonally adjusted demand for the week of June 1 - June 7 is now 25% higher than it was pre-pandemic in January and February, marking the eighth straight week of rising demand."
Construction, rents, and STRs
Demand and sentiment aren't the only positive news across the real estate industry. We've seen positive economic indicators from new construction and multifamily rents as well as a bounceback in short-term rentals (STRs) with a boost in domestic travel.
New U.S. Census Bureau data shows that building permits are up 14.4% in May month over month. Further, housing starts gained 4.3% since April 2020 and housing completions jumped 7.3% during the same period.
According to the National Multifamily Housing Council (NMHC), 89% of apartment renters paid June rents, as of June 13, 2020. During the same period for 2019, 88.9% of renters had paid rent, putting both years on par despite the current economic downturn. We saw similar rent trends for April and May 2020.
According to industry data from Key Data Dashboard, we are seeing strong demand among domestic travelers for vacation rentals across the country. According to their data, during late April and May, bookings for arrivals within 20 days had the highest increase year over year. Further, data from AirDNA shows a continued increase in STR bookings, from a low of 244,000 in April to over 1 million in June.
The bottom line
Residential housing is faring well so far during the ongoing economic turmoil. Given the positive economic indicators above, the real estate industry may be poised to help buoy a forthcoming economic recovery.
There are some obvious pain points for this sector -- not the least of which are office and retail -- but overall, the housing market appears healthy despite the challenges of the current macroeconomic situation.