Zillow Market Pulse: October 5, 2020

October 5, 2020

Mortgage delinquency rates keep getting better, but the rate of improvement is slowing. The national rate of tenants paying their rent is mostly even from a year ago — but is well behind in some local markets. And the health of the service sector greatly improved in September.

Mortgage delinquencies decline, but improvement is slowing

• 6.88% of outstanding mortgages were at least 30 days behind on payments in August, down a scant 0.03 percentage points from July, according to Black Knight.
• If the current rate of progress continues, more than a million loans will be behind on payments when forbearance programs begin to expire in March 2021.

Generally steady U.S. rental payment rates obscure big regional variation

• 92.2% of U.S. households renting professionally managed apartments paid at least part of their September rent, down just 1.5 points from September 2019.
• The gap between September 2019 and 2020 payment rates in Las Vegas (-6.5 points), Los Angeles (-4.4), New Orleans (-4.3) and other local markets is far higher.

For the first time since February, the service sector is adding jobs

• The employment index of the ISM Non-manufacturing Index rose 3.2 points in September from August, to 51.8 (values greater than 50 indicate expansion).
• The overall index also trended higher in September, rising 0.9 points on the month to 57.8.

So what? 

The share of homeowners behind on monthly mortgage payments – including those in forbearance plans – fell from July to August, but did so only modestly, raising concerns over how long this measure will continue to fall as the year rolls on. The 0.03 percentage-point reduction in the share of loans that were at least 30 days past due on payments was well down from the 0.85-point decline from June to July. According to Black Knight, the decline is an indication of delinquencies becoming more persistent. The pace of recovery has slowed in the last three months, and if the current three-month trend continues going forward it will take 19 months (until March 2022) before delinquencies return to pre-pandemic levels, according to the report. This poses serious concerns given the structure of mortgage relief programs. Forbearance programs offered through the CARES act have a 12-month expiration period. When the first mortgages begin reaching that threshold in March 2021, Black Knight estimates there may still be a million loans behind on payments — higher than initially anticipated and a level that raises some concerns regarding a foreclosure wave in the spring. On a happier note, the August increase in serious mortgage delinquencies was the smallest in months and the inflow of new mortgage delinquencies continues to shrink, suggesting peak demand for mortgage relief may be near.

U.S. rental payment rates appear to be staying afloat. The National Multifamily Housing Council reported that 92.2% of households living in professionally managed apartments made a monthly rent payment by Sept. 27. While that rate is 1.5 points below the share that made payments in September 2019, it's a far cry from the steep decline in payments many predicted when enhanced federal fiscal assistance expired at the end of July. But while the national rate has held mostly firm, payment rates in some metro areas have fallen sharply. According to real estate data and analytics company Realpage, 10.6% of tenants in Las Vegas failed to make their September payment, up 6.5 points from the same period last year. Five additional major metros – including Los Angeles, Portland and Seattle — recorded similar gaps of more than 3 percentage points. By and large, expensive markets and/or those dependent on tourism or other industries heavily impacted by the pandemic saw disproportionately higher declines in rental payment rates.

The outlook for the broader economy got a boost with the release of the September ISM Non-Manufacturing Index, a key read on the state of the service sector which makes up about 80% of the U.S. economy. The reading of 57.8 was 0.9 points higher than August's headline figure, indicating that the sector is not only expanding but doing so at an accelerating pace. The expansion itself isn't overly surprising, but the accelerating improvement was welcome news for an economic recovery that has shown some signs of wavering in recent weeks. The most encouraging news from the release was the fact that the employment subindex jumped 3.2 points to 51.8, indicating — for the first time since February — that companies are expanding their workforce. There's a long way to go, and this data in particular is notoriously vague and at times misinterpreted, but a seemingly strengthening service sector is definitely good news at this point.

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