Zillow Market Pulse: July 29, 2020

July 29, 2020

Pending sales volume rose strongly for the second straight month. For-purchase mortgage applications took a subtle step back last week. And the reported national homeownership rate skyrocketed in Q2, though the jump was likely due to underlying changes to the survey rather than marked shifts in household behavior.

Pending sales has another strong month in June

• NAR's measure of pending home sales activity in June rose 16.6% from May.
• The index now sits at 6.3% above last June's levels and is at its highest point since April 2016.

For-purchase mortgage applications took a small step backwards

• The MBA's seasonally adjusted measure of for-purchase mortgage application activity fell 2% last week from the week prior.
• The measure remains up 21% year-over-year, but has fallen on a weekly basis in four of the last six weeks.

A strong spike in the homeownership rate comes with some questions

• The U.S. homeownership rate rose 2.6 percentage points – easily the largest one-quarter jump – to officially sit at 67.9%.
• Fundamental changes to the survey's data collection efforts likely skewed the results.

So what?

Pending home sales activity registered another strong month, rising 16.6% in June from May to its highest level since Spring 2016. The index is now up 6.3% from last year. Annual comparisons in housing activity metrics are challenging to make at the moment, due to the fact that the spring selling season was basically delayed by 6 weeks or so and buyers have spent the last couple months making up for lost time. Nevertheless, today's pending sales reading – a leading indicator for closed sales in July and August – was the latest signal that demand for homes has held firm through the early summer and that the housing market remains one of the bright spots in today's economy. Citing the better-than-expected report, NAR increased their outlook for home sales for the remainder of the year. But despite this promising news, the risks that have increased in prominence over the last few weeks both remain and are becoming more acute. Still-rising coronavirus case counts, asymmetric plans for containment and reopening, and uncertainty around the next round of fiscal relief all pose a threat to the recent rally of home sales. So too does a historic shortage of for-sale inventory, which will likely hinder the recovery even if the previously mentioned risks ease.

Another leading signal in the housing market – the Mortgage Bankers Association's weekly reading of for-purchase mortgage application activity – suggests that these risks may already be starting to impact market activity, albeit very slightly. The index has seen a remarkable, V-shaped recovery since reaching lows in late April, thanks in large part to mortgage rates that have essentially flatlined near all-time lows for the better part of a month. But recent weeks have seen the index level off, or even decline just slightly. The seasonally adjusted measure of for-purchase loan activity has fallen in two of the last three weeks and four of the last six. On the other hand, activity remains above its pre-pandemic levels and near the highest point in at least a decade. Low interest rates should continue to fuel demand from buyers, but inventory shortages, seasonal headwinds and risks posed by the pandemic are likely to play a larger role on buyer behavior now that the delayed "spring shopping season" is nearing its end.

 Lastly, the one-quarter spike in the national homeownership rate appears to be a remarkable development, until you look more closely. The housing market has seen a series of notable shifts in recent months, including a steady stream of homebuyer demand and a wave of (particularly young) renters moving back in with family in order to save on monthly costs. Both of these trends, in theory, would drive the homeownership rate upward, and that could be taking place. But the unprecedented spike cannot be explained by these factors alone. More likely, the shift in the series is explained by fundamental changes to the survey's data collection methodology in response to the COVID-19 pandemic, a difference which makes it difficult to confidently compare these results to those of previous iterations of the survey.

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