Zillow Market Pulse: November 11, 2020

November 11, 2020

Banks continue to tighten lending standards in the face of persistent economic uncertainty. Mortgage delinquencies and foreclosures are up, but the overall health of the mortgage market is stronger than the headlines suggest. And the rent keeps getting paid at professionally managed buildings.

Lending standards tightened further in 2020's third quarter

• In Q3, the share of banks saying they tightened lending standards was, on net, 11.5 percentage points higher than those that said they loosened standards, according to the Federal Reserve.
•  For-purchase mortgage applications fell week-week again, but remain 16% above last year's pace.

Don't read too much into seemingly big increases in delinquency & foreclosures

• 1.2% of loans are at least 150 days past due according to CoreLogic, and ATTOM reported that foreclosures increased 20% in October.
• The increased long-term delinquency is due to participation in forbearance programs, and foreclosures are down 80% year-over-year.

Rental payment rates continue to hold firm

• 80.4% of households living in professionally managed apartments paid at least part of their monthly rent through November 6, according to the National Multifamily Housing Council.
• That rate is just 1.1 percentage points below last year's levels and ahead of the 79.4% payment rate at this point in October.

So what? 

Despite the fact that many sectors of the economy experienced meaningful improvements in Q3, banks further tightened lending standards on all loan types — including mortgages — citing a still-uncertain economic outlook. The net percentage of banks applying more stringent criteria to their mortgage lending practices was far less than the net share in Q2 2020, when the difference between the share of banks tightening standards and the share loosening standards was more than 50 percentage points. Still, the Q3 reading was far above any reading prior to the pandemic. While the still-elevated level of tightening signifies that banks are being extremely cautious given the tentative economic outlook, mortgage lenders' restraint is likely also a product of demand. Mortgage rates have remained at or near all-time lows for months, something that has prompted a surge in demand both for home purchase loans and refinances. Applications for mortgages remain well above last year's levels, as well as levels from the past several years, even as purchase loan applications have slipped recently compared to prior weeks.

Mortgage delinquencies and foreclosures increased in August and October, respectively, but those increases likely exaggerate any claims that the mortgage market is broadly unhealthy — though the data do point to some looming challenges for the market. CoreLogic's measure of "extremely delinquent" loans – those at least 150 days past due – reached its highest level ever in August, twice where it was in January 2010 at the height of the Global Financial Crisis. But the uptick is driven by widespread participation in mortgage forbearance programs, and encouragingly, the share of loans delinquent between 30-and-59 days fell year-over-year. The uptick in foreclosures was maybe more surprising, given participation in forbearance programs, but the notable monthly increase fails to account for the bigger picture. Even though foreclosures increased 20% in October from September, they remain down almost 80% year-over-year. Foreclosure activity remains very low overall, though an increase of some kind should be expected if/when forbearance programs expire in 2021. What impact that will have on the housing market remains to be seen, but early indications suggest that government support and high levels of accumulated home equity should dampen the impact.

The share of households living in professionally managed apartment properties who made a November rent payment in the first week of the month fell slightly from last year's rate but not alarmingly so, continuing a trend that has played out since the early spring. The 1.1 percentage point difference in payment rates through November 6 2020 and 2019 was notably smaller than the annual differences recorded in the summer months. That said, the more-or-less steady payment rate may be masking some underlying issues plaguing the broader rental market. The report doesn't identify what share of the 80.4% of households that made a payment only paid part of their rent and/or were only able to stay current because of an accommodative arrangement made by their landlord that may require larger payments down the road. Additionally, this report only examines payment rates in larger, professionally managed rental properties which, in some cases, may have a larger financial buffer than landlords of smaller operations. Lastly, people's ongoing ability to make rent may fade going forward as savings generated from direct stimulus checks and other measures earlier in the year start to dwindle. Still, the fact that a key measure of rental rates hasn't plummeted is obviously a good sign for the state of the housing market.

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

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Zillow Weekly Market Report, Data Through Oct. 31

The number of days homes are staying on the market remains at a record-low in the face of intense and persistent buyer demand. Sales are at levels not seen since prior to the Great Recession and are expected to remain high, and prices continue to grow quickly.

September was the best month for existing home sales since 2006

• Closed sales of existing homes continued to grow at a torrid pace in September, rising 9.4% from August and 20.9% year-over-year to a seasonally adjusted annualized rate (SAAR) of 6.54 million — the highest rate recorded in any month since early 2006, according to data from the National Association of Realtors (NAR).
• Buyer demand remains very high and sales volumes are expected to stay elevated in coming months, especially relative to last year. But modest slowdowns in mortgage application and pending sales data indicate sales are likely to recede somewhat in coming months:
  • Seasonally adjusted purchase mortgage application activity remains 25% above typical levels seen from 2016 through 2019, but has fallen 7.9% from recent highs in mid-September.
  • NAR's seasonally adjusted pending sales index (a leading indicator of closed sales to come in the next 1-2 months) slipped 2.2% in September from August – the first monthly decline since April (though the index remains 20.5% above last September's levels).

Time on market matches record lows

• Robust buyer-side demand persisted through October. For the fourth consecutive week, homes typically stayed on the market for 12 days, a full 17 days faster than the same time last year.
• There were 25,158 listings that went pending last week, similar to volume seen in near-peak buying periods of late April and early July in 2019. 
• Pending sales were up 19.7% year-over-year, though they have slowed 3.1% since last month and 1.3% since last week. 

Scalding homebuyer demand continues to drive inventory lower

• Available inventory fell for the 23rd straight week and is now down 37.4% compared to last year.  Demand for homes is still sky high, and current homeowners cite a lack of confidence in their ability to secure and afford a new home among reasons they're not selling. 
• New listings on the market dropped 7.4% year-over-year, and were down 7.9% from the week prior. 

Price growth continues months-long stretch of uninterrupted annual growth

• Median list prices have grown year-over-year in every week since early May, and are now up 11.8% from the same period a year ago. Compared to last week, typical list prices were down $500, to $345,500 — the first weekly drop since mid-April. 

Homeowners that do decide to sell are realizing big gains. Median sale prices rose to $289,625 in the week ending Sept. 19 (the latest week for which sales price data is available), up 12.5% over the same period in 2019.

Home value growth expected to continue accelerating in coming months

• We expect seasonally adjusted home values to increase 2.9% between September and the end of 2020, and rise 7% in the 12 months ending September 2021. This forecast is notably more optimistic than previously: Our prior forecast called for a 4.8% rise between August 2020 to August 2021.
• Historically low levels of for-sale inventory teamed with robust buyer demand and mortgage rates that remain near historic lows should continue to place upward pressure on prices. 

2020 home sales likely peaked in September, expected to reaccelerate early next year

• Our forecast suggests that closed home sales reached a recent high in September, and will temporarily slow down in coming months, falling to pre-pandemic levels by January 2021. Growth is then expected to resume next spring and to remain firmly above pre-pandemic volume through most of next year.
• This short-term deceleration in sales volume can be attributed in large part to an expected slowdown in GDP growth, the fading impact of historically low mortgage rates, fewer sales occurring that were deferred from earlier this year and historically low levels of for-sale inventory. An expected reacceleration of GDP growth in 2021 should help push sales volumes higher.

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¹Using the closest daily rates available from the Freddie Mac Primary Mortgage Market Survey. Monthly payments calculated with Zillow's Mortgage Calculator using 20% down payment. 

Methodology

The Zillow Weekly Market Reports are a weekly overview of the national and local real estate markets. The reports are compiled by Zillow Economic Research and data is aggregated from public sources and listing data on Zillow.com. New for-sale listings data reflect daily counts using a smoothed, seven-day trailing average. Total for-sale listings, newly pending sales, days to pending and median list price data reflect weekly counts using a smoothed, four-week trailing average. National newly pending sales trends are based upon aggregation of the 38 largest metro areas where historic pending listing data coverage is most statistically reliable, and excludes some metros due to upstream data coverage issues. For more information, visit www.zillow.com/research/.

Click here to read past editions of Zillow's Weekly Market Report.

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Intense Competition Pushes Share of Homes Selling Above List to Record High

• A greater share of homes sold above their list price in September (22.4%) than in any month since at least January 2018, another byproduct of incredibly strong buyer demand. That share has grown each month so far this year, pushing well past the typical high point as the market continues to defy seasonal norms.
• Homes priced near the typical U.S. home value appear to be the most sought after, with 28.2% of homes in that price quintile selling above list in September.  
• Compared to last year, the share of homes that sold above list in September doubled in Phoenix, San Diego, Denver, Virginia Beach and Riverside.

More than one-in-five homes sold nationwide in September went for more than the asking price, another example of a seasonal and historical aberration in a year chock full of them — and the latest evidence that sellers have the upper hand in the 2020 housing market.

It is not uncommon for certain homes to generate offers above list price. But the frequency with which homes are selling above list price this year is both historically and seasonally unusual.   Of all U.S. homes sold in September, 22.4% went for more than their asking price — roughly 50% higher than both the long-term average (14.5%) and for the month of September in both 2019 and 2018 (around 15% in each year), according to a Zillow analysis of sales and list prices. The data point to robust competition and likely bidding wars over the extremely limited supply of homes for buyers to choose from — a home selling above list on its own does not necessarily mean that home received multiple offers, but it's a very strong indicator.

Typically, July is the month in which the highest share of homes fetch more than their list price, but September 2020's figure was noticeably higher than July of this year (18.2% of homes sold above list), last year (16.1%) and 2018 (17.7%). In a typical year, the market cools in August and September — but the market accelerated into the early fall this year, defying historical seasonal patterns. If most sellers dream of a bidding war pushing their gains beyond their initial expectations, then the evidence suggests that in a year that has otherwise been filled with nightmares, many home sellers' dreams are nevertheless coming true as we approach the end of the year.

Widespread Gains

Gains in the share of homes sold above list were widespread across both geographies and market segments. Sales above list were most common for homes priced just above and below the typical September U.S. home value of $259,906. Homes priced in the second quintile of all U.S. home listings — between $192,001 and $264,000 — sold above list in 28.2% of September sales. Homes in this price range are also selling incredibly quickly — a recent Zillow analysis of time on market found similarly priced homes typically sold faster than any other price tier in September.  

Homes priced between $264,001 and $346,000 nationwide, sold above list price 25.9% of the time in September, up from 16.4% in the previous year. And 21.8% of homes in the move-up segment (priced between $346,001 and $487,000) sold above list in September, up from 13.4% a year ago.

Because progressively fewer buyers can afford homes at higher price points, it is common for the most expensive homes to generate fewer offers above list price. But even in the premium home segment, there is significant evidence of intense buyer competition. Roughly one-in-six (15.7%) of homes in the most-expensive segment (priced higher than $487,001) sold above list in September, up from 10.5% in 2019 and the highest share sold above list in this price range in any month since at least January 2018, the earliest month included in the analysis. 

The data also show extraordinary year-over-year changes in buyer behaviors in individual markets that reflect the unprecedented nature of 2020.  The share of homes sold above list is up from last month and higher than a year ago in each of the 50 largest U.S. metros, and has more than doubled year-over-year in five of the top 50: Phoenix, San Diego, Denver, Virginia Beach and Riverside. In Phoenix, 27.9% of homes sold above the initial asking price in September, up from 11.8% in the previous year.  Market conditions in these markets are clearly markedly different than they were only 12 months ago.  

Among the top 50 metros, San Francisco had the highest share of homes that sold above list price in September at 48.9%, up from 43.4% in September 2019. That almost half of buyers were able — if perhaps not entirely "willing" — to pay more than the list price in what has perennially been one of the nation's most-expensive housing markets speaks to the complicated relationship between a number of unique local factors, including: The enduring desirability of the area; the high incomes of many willing to pay the price to live there; and the very limited number of homes available to buy in the first place. It could also indicate that sellers may be underestimating the strength of the local market and pricing too conservatively — or, for some savvy sellers, it could validate the strategy of pricing low on purpose, in hopes of generating competition that will drive the ultimate price up. The Bay Area will continue to grapple with huge housing affordability challenges, but its clear that ultra-low mortgage rates are helping local buyers stomach otherwise nosebleed-level prices. 

A Sense of Urgency

Perhaps unsurprisingly, homes that sold in the shortest amount of time — indicative of more-intense competition for these properties — also were more likely to sell above list. Nationwide, of homes that sold in 10 days or less, an average of 28.5% sold above list since 2018 . The longer homes stayed on the market, the less likely they were to sell above list — although its not unheard of: Among homes that took 60 days to sell, about 10.4% received an offer above list.

Potential buyers may be feeling urgency to lock in low mortgage rates while they last, especially if they sense prices will slip further from reach in coming years. Many others may be taking advantage of new freedom to telecommute from an area where they can more easily afford a home. In either case, the housing market is taking us all back to Economics 101 and teaching lessons about supply and demand. There are simply more prospective buyers than sellers right now, and this imbalance is driving prices higher than we typically see at this time of year. Many buyers in the market right now will need to be realistic about the possibility of bidding wars, and leave themselves financial flexibility by looking at homes listed for less than their maximum price point. 

After a brief freeze in activity in the early months of the coronavirus pandemic, the housing market has been scorching hot throughout the summer — but there are signs of an expected seasonal cooldown as we approach the end of the year. Modest drops in both mortgage applications and pending sales indicate that closed sales are likely to recede somewhat in coming months. Still, with tight inventory, low interest rates, and robust demand from households re-evaluating their housing needs, a competitive market is likely here to stay into 2021 — which may mean many listings are likely to fetch their seller a surprising bonus above their initial expectations.

 

Methodology

The share above list price figures reported in this analysis are computed from a matched data set of final sale prices and first list prices.  Share above list price by tiers are computed as the three month trailing average of homes that sold above the list price within each sale price quintile.  Sale price quintiles and tiers are computed monthly.  National figures are computed as an inventory-weighted average of the state-level share of homes sold above list, which is necessary for computational considerations.

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Zillow Market Pulse: November 9, 2020

November 9, 2020

Promising results from an early coronavirus vaccine trial sent markets soaring. Treasury yields spiked to their highest levels in months and mortgage rates rose significantly. The Federal Reserve called for more fiscal support in the face of surging virus cases, and hinted at more market easing initiatives.

Encouraging vaccine news stokes financial market optimism

• Pfizer published preliminary data showing its coronavirus vaccine is 90% effective.
•  Economic growth in sectors most affected by the virus stayed flat.

The virus continues to influence Federal Reserve actions

• Last week, the Federal Reserve kept key, benchmark interest rates unchanged.
• Fed Chair Jerome Powell pointed out the need for more government stimulus amid rising cases and the waning benefits of earlier relief packages.

Mortgage rates spike on vaccine news

• Increased optimism pushed the yield on the 10-year U.S. Treasury to its highest level since March.
• Mortgage rates rose strongly as a result, erasing almost all of last week's declines.

So what? 

The fate of the economy's recovery depends largely on the evolving path of the pandemic, and our ability to handle it — and markets soared today on promising, if early, signs of progress towards an eventual vaccine. Economic activity has improved from springtime lows, aided initially by unprecedented government support that has since expired. But high-frequency indicators suggest that the virus has and will continue to constrain activity and optimism. In the week ending October 25, levels of consumer spending were 3.9% below January, and the pace of improvement has stalled since early September. Even as some parts of the economy show real signs of progress, there are clearly portions that cannot recover until the virus has been corralled: Entertainment spending is down 54.8% from January; spending at restaurants and hotels is down 29.1%. At the end of September, the number of small businesses in the leisure and hospitality sector was 36.9% less than at the beginning of the year. So even as much of the world remains firmly in the grips of a devastating uptick in cases over the last several weeks, today's news was a shot in the arm for hopes of an eventual return to normalcy.

The worsening virus surge was a key theme in statements made at the most-recent meeting of the Federal Reserve's Federal Open Market Committee. Fed Chair Jerome Powell emphasized the fragility of U.S. households' budgets and the risks to the economic recovery posed by the coronavirus' accelerating spread, particularly if no additional fiscal support is passed in Congress. As expected, the Fed kept key interest rates near zero, and Powell hinted that the central bank could adjust or increase its pace of asset purchases should the economy's recovery continue to slow. An uptick in asset purchases would likely place more downward pressure on bond yields, and thus mortgage rates.

Today's encouraging vaccine news and more certainty surrounding the outcome of U.S. elections combined to push bond yields strongly upward, and mortgage rates followed suit. The yield on the 10-year Treasury bond briefly touched its highest level since March, before retreating slightly near the end of the trading session. The yield curve of U.S. government bonds grew to its steepest shape since February 2018, an indication of quickly-growing optimism and appetite for risk in financial markets. Mortgage rates didn't move by quite as much, but did rise and essentially erase all of the declines (or improvements) made last week in the immediate wake of the election. Even so, mortgage rates in general remain very low, and the recent weakening of their long standing relationship with Treasury yields suggests that any upward movements will be muted compared to those of Treasury yields. But today's market behavior was a reminder that mortgage markets are certainly not immune to coronavirus-related developments.

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Zillow Market Pulse: November 6, 2020

November 6, 2020

The U.S. labor market improved in October from September, and unlike the month before, appeared to do so for the right reasons. But problems persist: measures of persistent job loss remain elevated and more than half the jobs lost in the Spring have not been recovered.

The job market continued its gradual recovery in October…

• The U.S. economy added 638,000 jobs in October.
• The headline unemployment rate fell to 6.9%, down a full percentage point from September.

…But, like before, signs of stress persist…

• A third of all people unemployed but in the labor force have been jobless for at least 27 weeks.
• Alternative measures of persistent unemployment have barely improved and remain near pandemic highs.

…And the path forward remains uncertain.

• The labor market is still down almost 12 million jobs from where it would be had the pandemic not occurred.
•  55% of the jobs lost in March and April have not returned.

So what? 

The October jobs report offered both encouraging and discouraging signals for the U.S. labor market. The U.S. economy added 638,000 jobs in October from September, a figure that would have been larger without the removal of about 150,000 temporary Census jobs. The headline unemployment rate dropped a full percentage point, to 6.9%, and unlike September's report, the decline in overall unemployment appears to have occurred for healthy reasons. Both the labor force participation rate and the share of people who are employed both increased from September, as did the overall size of the labor force. All three of these metrics remain well below their pre-pandemic levels, but after September's weak showing, October's improvements could indicate that people are gaining confidence in their ability to find employment.

But it's critical not to overlook signs of weakness, too — particularly the fact that joblessness is becoming increasingly permanent. While temporary job losses declined, continuing a trend that has been playing out for months, measures of persistent or permanent unemployment barely improved in September and remain near their highest pandemic-era levels. There were 3.6 million "long-term" unemployed people — those out of work for 27 weeks or longer – in October, up about 46% from September and representing 33% of all people currently unemployed but still in the labor force. Given the still-elevated level of jobless claims and ongoing spread of the coronavirus, an increase in this metric isn't a surprise, but it also reinforces a key challenge that the labor force will face going forward. Generally, the longer people are out of work, the harder it is for them to reconnect with their old employer and, more broadly, to find work even when jobs become available.

As expected, job growth has slowed markedly in the past few months and more than half (55%) of the jobs lost in March and April have failed to return. Assuming the same level of job growth as before the pandemic had continued, estimates suggest that the labor market is still down about 11.7 million jobs compared to where it would have been had the pandemic not occurred. What's more, the report fails to account for the 7 million workers who remain employed but have seen their hours or wages cut in recent months. Meanwhile, jobless claims remain elevated – more than a million people filed for initial jobless claims last week. The outlook for the job market depends most of all on the path of the coronavirus and the potential for additional federal, fiscal relief. Today's report showed that state and local governments — suffering huge losses in revenues because of the pandemic — cut 130,000 jobs in October, and will continue to contract without additional relief.

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Zillow Market Pulse: November 4, 2020

November 4, 2020

Early election results sent bond yields down — and mortgage rates are likely to follow. Mortgage applications overall remained strong last week, though purchase loans in particular continued to slide somewhat. And improvement in the U.S. service sector slowed in October.

Bond yields fell sharply on preliminary election results

• The yield on the 10-year Treasury fell by about 0.1 percentage points on Wednesday, the most in any day since April.
• Following early election returns, bond market investors seemingly view a large fiscal relief package as less likely.

Enduring refi demand buoys mortgage application activity

• The Mortgage Bankers Association's Weekly Mortgage Applications Survey showed combined, seasonally adjusted mortgage application activity improved 3.8% in the week ending October 30 from the week prior.
• Refinance activity rose 6.4%, while home purchase loan applications slipped by 1.3%.

Improvements in service-based industries slowed in October

• The ISM Services Index fell 1.2 points from September to October, to 56.6.
• Any reading greater than 50 suggests the sector is expanding versus contracting.

So what? 

Thus far, stock markets have responded favorably to the preliminary results of last night's federal election, which is still unfolding. Many companies see the presumed outcome of a government in which each party controls at least one branch of government — limiting the possibility of sweeping changes to tax policies, health care and business regulation — as more-favorable for their outlooks. But the uncertain outcome also appears to have led to a spike in demand for government bonds, usually something that softens when the stock market improves. Bonds are viewed as a safe haven for investors, a relatively sure bet compared to more volatile stock markets. A day after rising to their highest levels since June, bond yields plummeted today, falling by more in one day than they have in any other day since April. In this case, bond market investors appear to be interpreting the uncertain election results as a sign that more economic stimulus is unlikely in the near term. Bond yields are a key determinant of mortgage rates, so today's developments suggest that mortgage rates will head back downward in the coming days.

Mortgage rates have already been very low for several months now, helping stoke demand for home purchases and refinances — and that demand remains hot. According to the Mortgage Bankers Association's Weekly Mortgage Applications Survey, applications for home refinance loans increased 6.4% in the week ending October 30 from the week before, and was 87.8% above the same week last year. Home refinance activity has steadily improved in the last few weeks, despite the fact that mortgage rates have barely budged, suggesting that there are many homeowners for whom refinancing still makes financial sense. Applications for home purchase loans also remain well above typical levels from the past decade, but activity has waned in recent weeks. Home purchase loan applications have declined by 7.9% since a recent high in mid-September.

While improvements and expansion in U.S. service-based industries in the U.S. – which make up about 70% of the nation's GDP – continued in October, growth slowed last month. The ISM Services Index slipped 1.2 points to 56.6 in October (any reading above 50 suggests that the sector is expanding overall). The report's major subindices, which highlight business activity, employment and new orders being placed, all also took a step back in October after improving in September. The index measuring service sector employment slipped 1.7 points on the month to 50.1, just barely in expansion territory. This deceleration aligns with expectations for the October jobs report, due this Friday, which many expect to show slowing job growth from previous months. The ISM services report was starkly different from their earlier read on the manufacturing sector, which showed factory activity rose to the highest level in almost 17 years in October. This improvement is likely attributable to recent increases in the relative demand for household goods as many service-based industries remain limited by pandemic-driven measures.

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Zillow Weekly Market Report, Data Through Oct. 24

The housing market is showing signs of seasonal cooling after a scorching hot summer sales season that stretched uncharacteristically far into fall. A nearly six-month acceleration of year-over-year list price increases stabilized this week at 11.7% above 2019. Buyers are quickly buying up what few homes are left on the market, with sales continuing to be dragged down somewhat by increasingly short inventory.

Buyer demand continues to push beyond seasonal norms

• Newly pending sales are up 19.3% since this time in 2019, but slowed 1.5% since last week in the latest installment of a seven-week downward seasonal trend. In the first week of September, newly pending sales were up 23.8% year over year. 
• A lack of new inventory and seasonal slowing appear to finally be tempering record sales figures, but weekly pending figures are now similar to those from last April and July — both of which are traditionally strong sales periods.
• Houses are on the market for a median of 12 days before an offer is accepted, which is unchanged from the past two weeks. This is 17 days faster than last year — another effect of strong demand pushing this year's home shopping season past its usual endpoint. 

The inventory well keeps getting drier

• The downward slide of inventory that began in late May continued, dropping 1.3% week over week and reaching 37.2% lower than at this time last year. The last time inventory grew year-over-year was at the end of July 2019. 
• New listings are down 3.7% from last year and 7.1% from the week prior. 

Sales price growth hits new high

• A run of weekly list price increases that began in late April has finally flattened out, with median list prices holding steady at $346,080, and could begin to fall as soon as next week in a typical-though-late decline. List prices climbed from 2.8% above 2019 the week of Feb. 1 up to 11.7% year over year this week.
• The median sale price was $288,225 in the week ending Sept. 12, up 11.4% since 2019 and up 0.2% week over week.

Would-be sellers are confident price growth is here to stay

• A Zillow survey shows general life uncertainty caused by the COVID-19 pandemic and precarious financial positions are the most common reasons people are waiting to list their homes for sale. 
• Nearly 40% of those planning to sell in the next three years anticipate a more favorable sale price if they wait, suggesting many homeowners don’t feel pressure to list during today's buying frenzy in order to get a good price.
• While soaring home prices bring challenges for buyers trying to save for a down payment, ultra-low mortgage rates are making monthly payments more affordable for those who can get into a new home.

Home value growth expected to continue accelerating in coming months

• We expect seasonally adjusted home values to increase 2.9% between September and the end of 2020, and rise 7% in the 12 months ending September 2021. This forecast is notably more optimistic than previously: Our prior forecast called for a 4.8% rise between August 2020 to August 2021.
• Historically low levels of for-sale inventory teamed with robust buyer demand and mortgage rates that remain near historic lows should continue to place upward pressure on prices. 

2020 home sales likely peaked in September, expected to reaccelerate early next year

• Our forecast suggests that closed home sales reached a recent high in September, and will temporarily slow down in coming months, falling to pre-pandemic levels by January 2021. Growth is then expected to resume next spring and to remain firmly above pre-pandemic volume through most of next year.
• This short-term deceleration in sales volume can be attributed in large part to an expected slowdown in GDP growth, the fading impact of historically low mortgage rates, fewer sales occurring that were deferred from earlier this year and historically low levels of for-sale inventory. An expected reacceleration of GDP growth in 2021 should help push sales volumes higher.

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¹Using the closest daily rates available from the Freddie Mac Primary Mortgage Market Survey. Monthly payments calculated with Zillow's Mortgage Calculator using 20% down payment. 

Methodology

The Zillow Weekly Market Reports are a weekly overview of the national and local real estate markets. The reports are compiled by Zillow Economic Research and data is aggregated from public sources and listing data on Zillow.com. New for-sale listings data reflect daily counts using a smoothed, seven-day trailing average. Total for-sale listings, newly pending sales, days to pending and median list price data reflect weekly counts using a smoothed, four-week trailing average. National newly pending sales trends are based upon aggregation of the 38 largest metro areas where historic pending listing data coverage is most statistically reliable, and excludes some metros due to upstream data coverage issues. For more information, visit www.zillow.com/research/.

Click here to read past editions of Zillow's Weekly Market Report.

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Mortgage Rates Fall As Covid-19 Cases Rise

Mortgage rates fell this week as coronavirus cases rose and hope for more fiscal relief dwindled sapping rising optimism among investors.

After steadily climbing earlier in the month to reach their highest levels since June, bond yields took a sharp turn downward in recent days as investors grew more fearful of states having to implement new lockdown measures due to rapidly rising COVID-19 case volumes. The unraveling of discussions around a fresh wave of fiscal relief also dampened investor optimism and pushed bond yields lower. Mortgage rates trended slightly downward as a result, although they did so only slightly, continuing a months-long trend of modest downward movements relative to bond yields. Looking beyond pandemic-specific developments, other news and data do pose risks to mortgage rates going forward.

Investors are sure to react to Thursday's release of Q3 GDP figures and, of course, the results of next week's federal election could certainly impact market activity.

 

 

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Zillow Market Pulse: November 2, 2020

November 2, 2020

A shortage of for-sale homes may finally be eating into home sales activity, but construction spending figures suggest that builders are doing what they can to bridge the gap. Oil prices suffered their worst month since the Spring.

Pending home sales slide in September

• The National Association of Realtors' pending home sales index fell 2.2% in September from August.
• The reading was the first monthly decline since April.

Home building leads to growth in construction spending in September

• Construction spending increased 0.3% in September from August (SAAR), according to the Census Bureau.
•  Spending on new homes increased 2.8% on the month and almost 10% year-over-year.

Oil suffers its worst month since March

• West Texas Intermediate crude oil futures (for December delivery) fell 11% in October.
• Markets fear that rising coronavirus case volumes will sap demand for fuel.

So what? 

NAR's Pending Home Sales Index – a seasonally adjusted measure of the number of homes that went under contract in a month, and a leading indicator for existing home sales – declined 2.2% in September from August, the first monthly decline since April. Even so, home purchase activity and general measures of buyer demand both remain elevated and very strong by most measures. Pending sales activity in September was 20.5% above last September's reading, according to the report. Separate readings of for-purchase mortgage activity remain near their highest levels in more than a decade, and homes nationwide are typically going under contract in less than two weeks – a historically fast pace. But the monthly decline in homes going under contract was likely an indication that record-low levels of for-sale inventory are finally eating into people's ability to purchase a home. According to Zillow's data, there are 37.2% fewer homes for sale across the country than there were this time last year. And NAR's measure of months of supply (the amount of time it would take to sell through all currently-listed for-sale inventory) was just 2.7 months, the lowest ever recorded in its monthly series.

One method of addressing this persistent shortage of for-sale inventory is to build more. A report from the Census Bureau released today showed that spending on residential construction continues to improve, even as spending on other forms of construction has slowed. September's seasonally adjusted annualized rate of spending on private residential construction projects overall rose by 9.9% from a year ago and 2.8% from August. Spending on new single-family homes rising a whopping 5.7% from August to September – the strongest monthly improvement since 2009. Spending on private, non-residential construction – things like lodging, office space and other commercial buildings — fell on the month and on the year. Despite constraints posed by the pandemic and shortages in land and labor, home builders are as confident as ever and poised to do their part to address the overall shortage of inventory on a market filled with eager buyers. Expect continued strong residential construction figures in the coming months.

In March, oil prices plummeted more than 50% — and briefly fell below $0/barrell — at the onset of the pandemic as mandatory closures, supply chain disruptions and fewer people traveling via car, airplane or boat led to a severe glut of oil. Conditions stabilized over the summer, but the situation in October — while not nearly as bad as the early spring — still represented a disturbing recent low. Newly-announced shutdowns and market uncertainty as a result of recently rising coronavirus case volumes worldwide have injected new concerns into the oil market. It is feared that stricter lockdown measures will weaken already shaky demand for airline travel, something particularly worrisome at a time when some major oil producing nations, like Norway, had ramped up their pumping rate to near pre-pandemic levels. Tuesday's federal election in the U.S. is also a source of uncertainty for oil markets. This diminished outlook will place further pressure on the U.S. labor market: Exxon Mobil announced last week that it plans to lay off 1,900 U.S. employees.

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Zillow Market Pulse: October 30, 2020

October 30, 2020

The U.S. economy grew at a record pace in Q3 2020, but it remains well short of its pre-pandemic state. Differences between how goods-producing and service-based industries have fared highlight the country’s uneven recovery and expose risks going forward. Housing indicators, meanwhile, continue their strong stretch.

Record quarterly growth for the U.S. economy masks its true state

• U.S. GDP increased at an annualized rate of 33.1% in Q3 2020 from the preceding quarter – the strongest figure ever recorded
• But that increase is compared to an incredibly low Q2 number, and the economy remains about 3.5% below where it was at the end of 2019

The report highlighted stark differences in how goods-producing and service sectors have fared

• Personal spending on services remains 7.7% below where it was in Q4 2019
• This poses severe challenges to the recovery of the largely service-based U.S. economy should the pandemic persist

Housing-related indicators were a bright spot in the report

• Residential investment increased by 12.3% in Q3 from the previous quarter
• Home improvements and broker commissions saw strong gains whereas home construction figures appear poised to improve in coming reports

So what? 

Headlines that (accurately) proclaim the U.S. economy grew at a record pace in the third quarter of 2020 from the previous quarter fail to tell the story of the true state of the economy. The 7.4% quarterly growth in real GDP – or 33.1% at an annualized rate — was indeed the strongest quarter-over-quarter improvement in the metric that the nation has ever seen, based on records that go back to 1947. But after the economy fell by 9% in Q2 – or 31.4% at an annualized rate – a strong bounceback was always expected in Q3, especially given the slew of federal assistance programs that were offered for months earlier in the pandemic. A deeper reading of the report shows that the economy has only partially recovered from the collapse earlier in the year. About two-thirds of the losses from the first half of 2020 have been recouped, and GDP is now about 3.5% below where it was at the end of last year, before the pandemic arrived.

In addition to the headline figures, yesterday's Q3 GDP report highlighted the stark differences in how various sectors have fared during the past few months. As was to be expected, personal spending on services – anything from medical appointments to sporting events – improved by far less than did overall spending. Services spending improved 8.4% from Q2 but remains 7.7% below Q4 2019 levels. Personal consumption of goods, meanwhile, is up 6.7% over the same period. This divergence could act as a warning sign for the economy going forward. Consumption of household goods has improved as people look to replace their consumption of services – for instance, buying exercise equipment to replace their gym pass. But at a certain point, demand for these sorts of products will wane. Meanwhile, services consumption will remain directly tied to the pandemic's spread or suppression, and won't recover until people feel comfortable frequenting public places. That poses real risk to the overall economy of which service-based sectors make up about 80% of the total.

One bright spot in the report was the role of residential investment in driving improved economic output in Q3. Residential investment – a collection of new single- and multi-family home construction, home improvement projects, broker commissions and some other minor factors – increased 12.3% on the quarter, or 59.3% at an annualized rate. Investment in home improvement projects and broker commissions each saw strong gains on the quarter, as renovations and home sales each have seen a strong stretch through most of 2020. Investment in single-family homes ticked up at an annualized rate of 5.5% on the quarter, but its contribution to overall GDP remains very low – below the lowest level reached during any recession dating back to 1959, aside from the Great Recession. Given recent trends in new home sales and home builder confidence, this suggests there is potential for much more single-family home construction in the coming quarters.

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Zillow Market Pulse: October 28, 2020

October 28, 2020

Applications for home purchase loans improved slightly on the week, halting a streak of four straight weekly declines. Safety concerns related to the pandemic may be contributing to increased rates of people quitting their jobs. And durable goods orders rose strongly in September, another good sign for the manufacturing sector.

For-purchase mortgage applications stop their four-week slide

• A seasonally adjusted reading of applications for home purchase loans increased by 0.2% in the week ending October 23 from the week prior, according to the Mortgage Bankers Association
• The index had fallen slightly for each of the last four weeks

The pandemic is causing some people to consider leaving their job

• A new poll conducted by the Associated Press-NORC Center for Public Affairs Research suggests that a quarter of current U.S. workers have considered quitting their jobs due to fears pertaining to the pandemic
• About 20% of workers have had to take leave as a result

Factory orders increased strongly in September, but rising cases threatens this momentum

• Orders for durable goods rose 1.9% in September from August
• But durable goods orders are still well below pre-pandemic levels and rising case counts threaten this growing optimism

So what? 

Applications for home purchase loans had fallen on a weekly basis for four consecutive weeks before today's announced modest weekly improvement. Today's release wasn't a blockbuster – the weekly improvement was minuscule – but it reinforced that homebuyer demand remains robust heading into the fall. Despite the four weekly declines, application activity pertaining to home purchase mortgage loans remains near its highest level in the last 12 years and 24% above last year's levels. This enduring homebuyer activity comes as inventory levels continue to plummet and price continue to spike. In the week ending October 17, there were 37% fewer homes on the market than there were in the same week last year, according to Zillow Economic Research, and the average purchase loan size that was applied for last week was $372,600 – a new all-time high.

Recent reports on labor turnover – the number of people entering or exiting employment or the labor force and the reasons why they're doing so – have highlighted what's usually an encouraging trend: more people are quitting their jobs. Quits are generally viewed as evidence of a strong or strengthening labor market, suggesting that people are sufficiently confident in their ability to find new employment that they decide to pass on their existing job, though there's reason for skepticism in the current environment. The number of people voluntarily leaving their roles fell slightly in August from July, but the level has increased by about 50% since a low in April. A new report suggests that the recent increases in quits may not be occurring for healthy reasons after all. A poll conducted by the Association Press-NORC Center for Public Affairs Research suggests that a quarter of current U.S. workers have considered quitting their jobs due to worries related to the pandemic, and about 20% of U.S. workers have had to take leave as a result. Lower income households – those making $30,000 or less annually – were disproportionately more likely to express these concerns. The report also showed a divide across genders. Half of women feel the pandemic is a major source of stress, compared to just 36% of men. All told, the report suggests that voluntary job losses may have been due to unhealthy factors such as safety concerns and childcare responsibilities, rather than people finding a better job. 

In another sign that the economy is finding its footing, seasonally adjusted orders for durable goods – products that are designed to last at least three years, often in factories – increased 1.9% in September from August. New orders for nondefense capital goods excluding aircrafts – a widely cited proxy for business investment – grew 1% on the month. Both series were above consensus expectations. The report was the latest piece of encouraging news for the manufacturing sector in recent weeks – the IHS Markit Purchasing Managers Index, released last week, showed that activity in the manufacturing sector was growing at its fastest pace since early 2019. But recent strong upticks in coronavirus cases threaten this mounting optimism. As global case counts rise across the globe, demand for goods may wane and supply chain issues may worsen from their already delicate state.

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Record Low Mortgage Rates Boost Affordability, But Mask Down Payment Difficulties

• Households that own their home typically spent 17.5% of household income on their monthly housing payments in September, down from 19.6% two years earlier. 
• Record-low mortgage rates are driving these affordability gains, but saving for a down payment remains a challenge for first-time buyers especially.  
• Home values have grown at about twice the rate as incomes over the past six years. The typical U.S. home is now worth 3.08 times the median homeowner household income, an all-time high in Zillow's data. 

Ultra-low mortgage interest rates are helping to keep monthly payments remarkably affordable for would-be home buyers and homeowners alike. But these same low rates are also helping to mask an alarming rise in price-income ratios, keeping homes affordable on paper while doing nothing in practice to help buyers put themselves in position to buy in the first place.

A would-be home buyer earning the median income for buyers ($83,674) and looking to purchase the typical U.S. home in September — assuming a 20% down payment and 30-year, fixed-rate mortgage at prevailing rates — could expect to spend 17.5% of their monthly income on a mortgage payment, taxes and insurance. The same buyer could have expected to spend 18.2% and 19.6% of their income each month on their core housing payments in September 2019 and September 2018, respectively, according to a Zillow analysis of housing costs and projected income growth over the past two years.

At current rates, mortgage payments on the typical local home are most affordable in Louisville (12.3% of income), Birmingham (12.5%) and Indianapolis (12.7%). They are the most burdensome in San Francisco (34.4%), San Jose (31.6%) and Los Angeles (29.9%). 

Rates at Historic Lows

Falling interest rates are the primary driver of improving mortgage affordability in recent years. Currently (as of Oct. 26, 2020), the average rate on a 30-year, fixed-rate mortgage is 2.8%, according to Freddie Mac, almost 100 full basis points less than the 3.75% average rate quoted at the same time a year ago. The other side of the affordability equation — incomes — are also improving. In September 2020, typical U.S. homeowner incomes grew an estimated 2.7% relative to the prior year, from $81,502 to $83,674. 

At the same time, the typical total monthly payment fell 1.4% year-over-year — but almost entirely on the back of lower interest rates. Because even as incomes grew, home prices themselves were growing even faster. While homeowner income was up 2.7% year-over-year in September, the typical U.S. home increased in value by 5.8% over the same period. Since September 2014, home values have grown 38.3%, roughly double the pace of homeowner income growth (18.8%) over the same period. 

It was not so long ago that a mortgage rate of 5% on a 30-year, fixed-rate loan was considered a steal — in weekly data from Freddie Mac going back to 1971 (which includes periods, like the early 1980s, in which rates in the teens were commonplace), the average rate on a 30-year, fixed-rate mortgage is 7.92%. Historically low mortgage interest rates have been a fixture of the market for the past several years, hovering in the mid-4% range for much of 2018 and 2019. But rates below 3% were virtually unheard of prior to the past few months — but have been below 3% on average in every week since July 30. 

Low rates are undoubtedly good news for would-be home buyers and particularly current homeowners, who have enjoyed big equity gains in recent years and can now refinance their mortgage to lower their monthly payments and save thousands of dollars over the course of their loan. But these low rates serve to mask an ugly truth: Without them, rapidly rising home prices and more-modest wage growth would threaten to put homeownership out of reach. 

The Price of Rising Prices

For the better part of the last 6 years, total monthly payments grew faster than incomes. In September 2020, the U.S. home price-to-income ratio was 3.1 — meaning the typical home was worth 3.1 times as much as the typical homeowner earned in a year — the highest multiple since at least 2014. In January 2014, the typical home was worth about 2.6 times the median homeowner income. Since 2014, the long-run average price-income ratio has been 2.8.

When income growth fails to keep pace with home value growth, it makes saving for a suitable down payment of even 5% or 10% — to say nothing of the "standard" 20% down payment assumed in this analysis — that much more difficult. Putting 20% down enables buyers to avoid paying additional private mortgage insurance premiums, but it's not required, and just 39% of buyers with a mortgage put down at least 20%, according to the 2020 Zillow Consumer Housing Trends Report. And it's no wonder: Saving for a down payment is a massive financial barrier for those looking to move into homeownership. More than a quarter of first-time buyers report difficulties saving for a down payment, and 40% of all buyers rely on a gift or loan from family or friends for at least part of their down payment, according to the same 2020 Zillow survey. 

At the start of 2014, a 20% down payment on the typical U.S. home would have been about $36,600, or 6.4 months of income for the median homeowner household. As of September, that down payment had grown to about $52,000 (on a home worth almost $260,000) — or about 7.5 months of income for the typical homeowner household. Zillow expects the typical U.S. home to grow in value by 7% over the next 12 months, to slightly more than $278,000 by September 2021. By then, the amount needed to cover a 20% down payment on that typical home will have risen to $55,600 — up about $3600 from today, or a full $300 in additional savings needed per month. Faced with this unrelenting rise in home prices, it's no wonder that buyers currently in the market may be desperate to quickly settle on a home and lock in a low rate — savings that are adequate today may not be tomorrow.

Among the 50 largest U.S. metros, down payments are most in reach for potential buyers in Cleveland, where a 20% down payment on the typical home is equal to 5.1 months of income for the median homeowner household. Milwaukee, Pittsburgh and Memphis have the next most affordable homes by this measure, each at 5.2 months of income. Homes are most difficult to save for in high-priced California metros, led by San Francisco (17.1 months of income), San Jose (16.1), Los Angeles (14.9) and San Diego (13.2). 

Mortgage interest rates are expected to stay low for the foreseeable future, but if and when they begin to rise again — even modestly — affordability and mobility may both deteriorate. There is the simple math that shows how even small rises in rates can impact monthly payments and ultimately limit buyers' budgets in the face of high prices. But there's also the long-discussed but yet-to-materialize specter of so-called "mortgage rate lock-in," in which existing homeowners that already have a very low mortgage interest rate may be unwilling or unable to move as rates rise. 

Renters Hit Disproportionately Hard

Renters, of course, cannot take advantage of low mortgage interest rates and finance their purchase over decades. They must spend more of their monthly income on rent than their homeowning peers will spend on a mortgage — and more money spent on rent is less money saved for a down payment. Even so, the share of typical renter income devoted to the typical U.S. rent was 29.9% in September, the lowest share since 2014 and below the 30% threshold at which a household is considered "rent burdened." This improvement can be laid almost exclusively on assumed growth in renter incomes since 2018, which would certainly be welcome news in almost any month…

…Except in our current moment. We have not yet modeled the full impact of COVID-19 on renter incomes, but research shows that renters have been hit disproportionately hard by unemployment and the lack of comprehensive and lasting fiscal assistance. Given this, it is likely that the current share of typical renters' income devoted to paying their rent is much higher in the current environment. We are currently working to incorporate these effects into a supplemental model of renter incomes, and look forward to publishing the results soon.

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Zillow Market Pulse: October 26, 2020

October 26, 2020

New home sales slipped slightly in September, but remain incredibly strong overall. The stock market suffered its worst day in a month as coronavirus case counts surged to new highs. And protections for renters are being challenged in court.

New home sales fall short of expectations, but remain elevated

• September new home sales fell 3.5% from August, but were up 32.1% from a year ago, to 959,000 (SAAR) according to the U.S. Census Bureau.
• There were 3.6 months' of supply of new homes available for sale in September.

Financial markets reels as coronavirus cases surge

• New COVID-19 cases are rising in the U.S. at their fastest pace yet – more than 83,000 new cases were reported on Friday.
• The development, plus stalled negotiations around fiscal relief, caused the S&P 500 to suffer its worst loss in a month.

Eviction moratoriums are being met with some pushback

• A national eviction moratorium announced in September is being challenged in court in a case supported by the National Apartment Association.
• A win for the plaintiff could force evictions to rise sharply.

So what? 

September new home sales fell somewhat short of expectations and represent a small decline from prior months - but at just shy of 1 million sales for the month (at a seasonally adjusted annual rate), it’s clear the new home market overall remains very strong. Year-to-date, new home sales are up 16.8% from the same nine-month period in 2019. A favorable mortgage interest rate environment, an enduring desire for brand-new homes and a longstanding shortage of existing homes available for sale continue to pay dividends for home builders. And builders are clearly taking notice – their expectations for sales volume over the next six months are the highest they've ever been. The question now is whether these goods times can continue and for how long. A lasting inventory drought matters less for new home sales than for the re-sale market – roughly two-thirds (67.6%) of new homes purchased in September weren't even built yet. But broader economic and social factors including persistently high unemployment and the spread of the coronavirus represent considerable potential constraints for new home sales. For now, though, these issues don't seem to be much of a threat to what continues to be a very solid run for new home sales.

Data compiled by Johns Hopkins University showed that the number of new daily COVID cases in the U.S. has risen by an average of just under 69,000 over the last week, a new record and up about 22% from a week ago. Experts acknowledged that testing volume has increased, which would drive up positive numbers on its own, but suggested that this alone can't explain the strong uptick. Daily new case counts are now at record-high numbers in more than 20 states, most of which are concentrated in the Midwest. This surge coincided with talks surrounding the next round of fiscal stimulus coming to a halt — and financial markets clearly took notice. On Monday, the S&P 500 recorded its biggest one-day drop in more than a month. Equity indices overseas fell similarly, and some fears emerged that Europe may be headed towards a double dip recession. As the pandemic nears the end of its seventh month, the developments are a stark reminder of the strong hold the coronavirus still has over the economy. 

The federal government issued a national moratorium on rental evictions last month, allowing renters nationwide to file for up to four months of rent payment suspension if their economic well-being had been damaged as a result of the pandemic. But reports suggest that many evictions are still taking place and the eviction ban has been met with a slew of legal challenges in the weeks since. A recent hearing of a case against the moratorium has been supported by the National Apartment Association, a group that represents 85,000 landlords responsible for 10 million rental homes. A ruling in the favor of the plaintiffs could offer landlords more flexibility to work around similar moratoriums and potentially prompt a surge in evictions in coming weeks. As of October 12, more than 8 million households were not caught up on rent payments, according to the Census. 

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Housing Affordability Methodology, 2020: A Bayesian Approach to Predicting Incomes

Past attempts at quantifying housing affordability suffered problems of both timeliness and specificity: Current housing costs were divided by literally years-old income data; and broad, median household income data was aggregated across two groups — homeowners and renters — with very different income profiles. 

Traditional housing affordability measures based on income data from the American Community Survey (ACS) do not provide clear insight into the current state of affordability because comprehensive ACS data are published at a lag: Data for 2019, for example, is only just now being published, in late 2020. And while current income data is available through the Bureau of Labor Statistics (BLS), it is also aggregated data and does not discriminate between renter household income and homeowner household income.  While BLS data do provide significant detail on industry specific incomes, industry-specific income data presents its own set of challenges for estimating renter and homeowner incomes separately, since the mix of renters and homeowners in each industry may vary significantly across different metropolitan areas.  

Zillow's new statistical models aim to address these challenges by predicting renter and homeowner incomes forward from their last published observation, and applying them to current housing costs. We publish this housing affordability data — measured as the share of a typical renters' income spent on typical area rent, and the typical homeowners' income spent on a mortgage for the typical local home — for 100 metropolitan areas and the United States as a whole. 

Our models include ACS data, the Zillow Observed Rent Index (ZORI), the Zillow Home Value Index (ZHVI) and earnings data from the Bureau of Labor Statistics. The final output (in this example, for renters) is based on this simple equation (with the numerator for homeowners substituted with observed Zillow Home Value Index for a given month):

The estimated monthly rent in the numerator is a weighted average of the reported contract rent in ACS microdata and Zillow's Observed Rent Index (ZORI).  The weights are the percentage of renters who reported moving in the last 12 months (reported via the MIGRATEPCT variable in ACS microdata). Our estimated monthly rent is:

Our goal is to compute the most timely measure of rent paid by the typical renter in each metro, and we include both ZORI and ACS data to leverage the strengths of different sources of information.   

We predict ACS renter incomes in months where it is not directly observed using a Bayesian statistical model — both in months between the annual releases from 2014 to 2018 and months since the last release in 2018. Our Bayesian model provides the statistical machinery to incorporate multiple sources of information and update predictions as new data is released.  Our model depends on observed ACS renter income and observed BLS income data. From a statistical standpoint, our main objective is to compute the posterior predictive distribution:

Where:

•  is monthly renter income from January of 2014 to September of 2020.
•  is the subsequence of renter incomes corresponding to ACS observations reported annually for 2014 – 2018
•  is the observed BLS monthly earnings data.

We model , the BLS reported income, as the sum of the renter income latent variable, and latent factor , the metro-specific deviation in general earnings from renter earnings. Latent factor  follows a dynamic linear model with a second-order polynomial structure: 

The model for latent renter income  has three components:

1. intercept , the expected renter income in December 2013
2. global trend , the expected monthly increase in renter incomes
3. a flexible function that models nonlinear deviations in renter income from the linear regression   +

 

Function  follows a Gaussian Process prior distribution and has a very important property for this application: the uncertainty intervals in predicted renter incomes widen as the time elapsed from the last observed renter income increases.  Overall, this latent renter income model is:

Model parameters are estimated with a custom Markov chain Monte Carlo algorithm, and we compute full predictive probability distributions of renter incomes and rent affordability rather than single point estimates.  Given that these estimates are statistical in nature, we believe quantifying the uncertainty in our affordability calculations is an important part of the analysis, and predictive intervals provide additional context to the state of housing affordability in the United States. 

We follow a similar process to calculate homeowners' incomes based on ACS and BLS data. Monthly costs for homeowners assume the buyer is purchasing a home valued at the typical level for a given metro (as measured by the Zillow Home Value Index), is putting down 20%, and is assuming a 30-year, fixed-rate mortgage at prevailing rates (as measured by Freddie Mac). We also make adjustments for local taxes and homeowner insurance costs.

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August Case-Shiller Results and September Forecast: No Signs of Cooling

• The S&P CoreLogic Case-Shiller U.S. National Home Price Index® rose 5.7% year-over-year in August (non-seasonally adjusted), up from 4.8% in July.
• Annual growth was up from July in the smaller 20-city index (to 5.2%, from 4.1%) and 10-city index (to 4.7% from 3.5%).
• Phoenix (+9.9%), Seattle (+8.5%), and San Diego (+7.6%) reported the highest year-over-year gains among markets in the 20-city index.

The remarkable surge in home prices continued into August as prices showed no signs of cooling down heading into the fall.

The national Case-Shiller Home Price Index rose 5.7% year-over-year in August. The smaller 10- and 20-city composite indices grew more slowly, at 4.7% and 5.2% year-over-year, respectively. The annual rate of growth was faster in August than in July in all three main indices. On a monthly (seasonally adjusted) basis, the 10- and 20-city indices were each up 0.5%, and the national index was up 1% from June.

	Zillow Forecast, Released 9/30/20	Actual Case-Shiller Indices, Released 10/27/20	Historical Median Absolute Error*
10-City Composite, Month-Over-Month (SA)	0.4%	1.1%	0.2%
10-City Composite, Year-Over-Year (NSA)	3.9%	4.7%	0.2%
20-City Composite, Month-Over-Month (SA)	0.4%	1.1%	0.2%
20-City Composite, Year-Over-Year (NSA)	4.5%	5.2%	0.1%
U.S. National Month-Over-Month (SA)	0.4%	1.1%	0.1%
U.S. National Year-Over-Year (NSA)	5.3%	5.7%	0.1%
*Calculation of Median Absolute Errors are based on Zillow’s forecasts dating to 2011.  The national Case-Shiller forecasts began in 2014.

By some measures, home prices are rising at a faster pace than they ever have – an incredible feat considering the market is rising from an already elevated level. The supply of for-sale homes, already extremely tight, has only become more constrained in recent months, and historically low mortgage rates continue to encourage many buyers to enter the market. This heightened competition for the few homes on the market has placed consistent, firm pressure on home prices for months now, and there are few signs that this will relent any time soon. While the path of the overall economy is likely to be most directly dictated by coronavirus-related and political developments in the coming months, recent trends suggest that the housing market – which has basically withstood every pandemic-related challenge to this point – will continue its strong momentum in the months to come.

Annual growth in September as reported by Case-Shiller is expected to accelerate in all three main indices. S&P Dow Jones Indices is expected to release data for the September S&P CoreLogic Case-Shiller Indices on Tuesday, November 24.

Index	Actual August Case-Shiller Change	Zillow’s Forecast for the Case-Shiller Sept. Indices
10-City Composite, Month-Over-Month (SA)	1.1%	0.7%
10-City Composite, Year-Over-Year (NSA)	4.7%	5.7%
20-City Composite, Month-Over-Month (SA)	1.1%	0.7%
20-City Composite, Year-Over-Year (NSA)	5.2%	6.2%
U.S. National Month-Over-Month (SA)	1.1%	0.8%
U.S. National Year-Over-Year (NSA)	5.7%	6.6%

Note: Case-Shiller and Case-Shiller Index are registered trademarks of CoreLogic Solutions, LLC. The statements herein are not endorsed by or provided in association or connection with CoreLogic, LLC.

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