Zillow Market Pulse: October 23, 2020

October 23, 2020

Existing home sales kept their summer surge rolling into September. Mortgage rates have increased recently, but by less than other data would suggest. And U.S. business activity rose strongly in October, raising hopes for a solid fourth quarter.

Existing home sales stayed hot in September

• September existing home sales rose to 6.54 million (SAAR), up 9.4% from August and 20.9% from a year ago, according to the National Association of Realtors.
• The median existing-home price in September was $311,800, up 14.8% from September 2019.

Stimulus talks and progress on virus treatment pushing U.S. Treasury yields up

• The yield on the U.S. 10-year Treasury has risen steadily in the last week, and now sits at its highest level in 4 months.
• Mortgage rates have also moved upward, but only slightly.

Business activity improved in October

• The IHS Markit U.S. Composite Purchase Managers Index (PMI) – a measure of business conditions – rose 1.2 points from September to October, to 55.5.
• A comparable index for the eurozone fell to 49.4 in October, suggesting activity abroad is contracting.

So what? 

The impressive run for existing home sales continued into September, as buyers stayed their course in the face of the ongoing pandemic and an unrelenting inventory shortage. Building on an already strong pace set in July and August, sales figures in September rose at their fastest annual rate since 2010, when the housing market was just beginning its slow recovery from the Great Recession. Red-hot competition for the few homes available – fueled, in part, by low mortgage rates and a wave of millennials graduating into their home-owning years – has placed remarkable upward pressure on prices, particularly for single-family homes. Annual growth of single-family home prices has risen by more in the last three months than in any previously recorded period dating back to 1969. This torrid growth in sales may ultimately be done in by an inventory crunch that's only getting worse - its hard to keep setting sales records when there's so little for sale - forcing a slowdown in transactions in the coming months. But with demand for housing as high as it is, it's unlikely that a slowdown in sales will be substantial.

Recent optimism surrounding discussions about a new fiscal spending package, as well as positive developments regarding an approved treatment for COVID-19, are among the factors that have prompted a steady increase in U.S. Treasury bond yields over the last few weeks. The current yield on the U.S. 10-year Treasury bond sits at about 0.83% — still historically low, but the highest level in four months. Normally, an increase in Treasury yields would coincide with rising mortgage rates — but while mortgage rates have trended higher in the last week, the upward movements have been modest. One reason is that the normally-reliable relationship between Treasurys and mortgage rates has frayed during the pandemic: Mortgage rates have remained very low for the past several months, but they aren't as low as Treasury yields suggest they should be. The surge in mortgage demand has forced many lenders to keep rates higher than they otherwise could in order to keep the volume of requests manageable and also account for perceived levels of risk. While this limits the potential for mortgage rates to move notably lower, it also limits the risk of a sharp uptick in mortgage rates should this upward momentum in Treasury yields accelerate.

The IHS Markit PMI's October reading of 55.5 was its highest since February 2019 (any reading greater than 50 suggests conditions are improving from the previous month). But the report wasn't all rosy — companies noted that demand slowed slightly in October from September, particularly from overseas buyers. New business growth in the services sector also took a slight step backward on the month, continuing to improve but at a slower rate than in September. Still, these minor setbacks don't appear to have derailed business optimism – confidence in both the U.S. services and manufacturing sectors improved in October to their highest levels since May 2018. The picture overseas, meanwhile, is far less optimistic. Surging case volumes across Europe have placed new restrictions on commercial activity and prompted some fears of a double-dip recession. So while the improved business outlook is undoubtedly good news, developments elsewhere are a reminder that the virus will continue to dictate the path forward for the economy.

Click here to read past editions of Zillow’s Market Pulse updates.

The post Zillow Market Pulse: October 23, 2020 appeared first on Zillow Research.

via Zillow Market Pulse: October 23, 2020