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Zillow Market Pulse: June 23, 2020


June 23, 2020

New home sales rose for the second straight month, and the rent is still getting paid. But households remain extremely vulnerable despite these improvements, in part because of rising household debt levels.

  • New home sales continue their solid recovery

    • May new home sales rose 16.6% from April and 12.7% from May 2019.
    • April's figures were revised downward, helping to inflate the monthly improvement in May.
  • People are continuing to pay their rent

    • Through June 20, 92% of households in professionally managed apartment units paid their monthly rent, according to the National Multifamily Housing Council.
    • The share is higher than the payment rate at the same time in May 2020, and about equal to that of June 2019.
  • Rising debt leaves many households vulnerable

    • Household debt is at a record high level, and the delinquency rate of personal, non-mortgage loans is rising.
    • Government assistance is helping for now, but many worry about what happens if/when these policies expire.

 So what?

Even with a healthy downward restatement to April's data, recent strength in new home sales is setting the stage for a swift improvement in the housing market that so far shows few signs of slowing. New home sales data is more timely than existing sales data, and today's report suggests would-be buyers remain eager to take advantage of favorable mortgage rates and enter the market while they can. The rapid improvement in sales of new homes may also reflect a change in consumer preferences, with buyers showing a newfound penchant for cleaner, never-lived-in homes - although the long-term durability of that trend remains to be seen. Either way, builders are taking notice: Builder confidence shot way up June – a sign of good things to come for a housing market that continues to struggle with exceptionally low inventory. Low inventory levels and tight lending conditions will continue to drag on the housing market, as will ongoing broad-based economic and public health risks associated with the pandemic. But at least for now, home buyers are largely disregarding those headwinds and the housing market appears poised to continue its improvement into the early weeks of summer.

In more good news for the housing market, even three-plus months into this pandemic people are continuing to pay their rent. According to the National Multifamily Housing Council (NMHC), the rate at which rental households made their monthly payments – at least in part – through June 20 was about the same as the same period last year and higher than the rate at this time last month. This is obviously excellent news given the huge job losses over the past few months, particularly among workers in lower-income occupations that are more likely to rent. But there are several reasons this news should be taken with a grain of salt. First, the NMHC figures only reflect households renting in 11.4 million professionally managed apartment units nationwide, about a quarter of the overall number of U.S. rental units and a cohort that likely skews towards a higher income bracket. More broadly, it also appears that much of this success can be directly attributed to federal financial support, including direct cash payments and expanded unemployment benefits, which have helped renters stay afloat and pay their bills. But some of this support has already or will soon expire without an extension, which may lead to large numbers of tenants falling behind on their rent. And the situation could rapidly become worse as some states, including New York and Colorado, weigh an end to eviction moratoriums put in place at the beginning of the crisis.

Even with federal assistance, the budgets for a huge number of households remain delicate and very vulnerable to any change in income. On average, U.S. households entered the crisis in a strong financial position, spending less than 10% of their income on debt service – the lowest percentage on record. But most of this improvement is thanks to strengthening of mortgage loans: Americans have built significant equity in their homes since the last crisis. But for credit cards and auto loans, the story is the opposite. U.S. residents owe just slightly less on their credit cards and cars than they did at the onset of the financial crisis, and delinquency rates on these loan types were already rising in the months leading up to the current crisis. Ominously, most of the pandemic-related job losses thus far have been in industries including tourism and manufacturing, where there is a higher concentration of hourly workers — many of whom are less likely to own a home, but almost certainly have some form of personal debt. Millions of households are making use of loan forbearance programs and payment holidays to stay afloat, but the fate of these borrowers once assistance expires remains very unclear. And if these lost jobs don't return as anticipated as businesses tentatively reopen, a wave of loan defaults and bankruptcies will almost certainly follow.


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