The Weekly Briefing - August 24th, 2020

The Weekly Briefing – August 24th, 2020:

In This Week’s Brief:

  • Leading Economic Index (LEI) Moved Upward in July; Progress on the Virus Vital to Economic Recovery
  • Renters Turning to Higher-Quality Properties, Lower-Density Locales, and Affordable Markets
  • For-Sale Housing Market Indicators Have Already Rebounded to Pre-COVID Levels

Leading Economic Index (LEI) Moved Upward in July; Progress on the Virus Vital to Economic Recovery

The Conference Board Leading Economic Index (LEI) increased in July for the third consecutive month as the U.S. economic recovery maintained positive gains but softening momentum. At 1.4%, however, the July figure does represent a meaningful deceleration compared to the two months prior when LEI registered gains of approximately 3.0% during both May and June. A resurgence of the coronavirus in many states across the country, particularly in the Southeast and parts of the West, undoubtedly contributed to the July slowdown. Many other real-time indicators of the recovery, such as spending levels, business and consumer sentiment, and small business revenue, highlight areas of positive economic traction since July, albeit at a reduced pace. The trajectory of the economic recovery is closely intertwined with progress in containing the novel coronavirus. As noted in the July FOMC meeting minutes, additional employment gains are dependent on reopening businesses, which in turn depends, “in large part on the efficacy of health measures taken to limit the spread of the virus.” The FOMC participants noted concerns about a labor market that is far from a full recovery, marked by elevated unemployment claims, which are particularly high for lower-wage and service-sector workers. As such, recent improvements in coronavirus case levels provide a measure of optimism for the economy, although as we saw earlier this year progress on the virus can reverse quickly without appropriate precautions. The ongoing reopening of K-12 schools across the country will be a major test for both containing the pandemic as well as supporting much-needed momentum for the economy.

U.S. Newly Reported COVID-19 Cases per 100,000 People

Renters Turning to Higher-Quality Properties, Lower-Density Locales, and Affordable Markets

Class A and B multifamily properties captured an outsized share of demand during the second quarter, especially in lower-density suburbs, according a report issued by the CoStar Group. Both property classes saw the number of occupied units increase with the strongest gains registered in suburban submarkets as social distancing led many renters to focus on larger units. In contrast, Class C assets, which typically are below institutional grade and owned and operated by ‘mom and pop’ groups, experienced a larger number of move-outs than move-ins. Since the start of the pandemic, rent growth at Class B properties has easily outpaced Class A communities, driven largely by new supply concentrated in the luxury segment. Deliveries during the past cycle focused heavily on the high-end of the market. CoStar classifies approximately 80% of units currently under construction as Class A, suggesting in the near-term new deliveries are likely to weigh on the performance of urban core, luxury buildings. A similar trend is playing out at the metro level, particularly in attractive and wallet-friendly Southern and Southeastern markets. Since April, these markets have outperformed more costly coastal metros in net absorption levels—even without adjusting for metro size. While this dynamic could prove short-lived once the pandemic is contained and big city amenities once again become available, for now multifamily demand data indicate less disruption in non-gateway markets.

Top and Bottom Net Absorption by Market Since April

For-Sale Housing Market Indicators Have Already Rebounded to Pre-COVID Levels

While the U.S. economic recovery overall appears to have lost a meaningful amount of momentum, the for-sale housing market has staged a sharp rebound to pre-pandemic levels. Record-low interest rates have fueled the market’s strong performance, but it remains unclear how much of the surge owes to pent-up demand after the coronavirus limited the spring sales season versus longer-term, sustainable trends. In the current low-for-long interest rate environment, we see conditions supporting elevated pricing amidst a demand/supply imbalance. The NAHB’s Housing Market Index (HMI), which measures home builder sentiment, surged six points this month to the highest level in the 35-year history of the HMI, fueled by continued strong sales activity. The improved outlook led builders to ramp up construction activity as housing starts and permitting jumped 22.6% and 18.8% respectively compared to a month prior; both now stand above YOY figures. The market for existing homes has exhibited a similar pattern. After strong growth in both June and July, existing home sales in July reached 5.9 million units—the highest level since 2006—and NAR reports median existing home prices are up 8.5% YOY. Adding pressure to pricing, unsold inventory is down to 3.1-month supply compared to 4.2-month figure YOY.

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