The Weekly Briefing - June 29th, 2020

The Weekly Briefing – June 29th, 2020

In This Week’s Brief

  • Consumer Spending Rebounds but States Remain Cautious
  • For-Sale Housing Indicators Improving, but Vulnerabilities Remain
  • CRE Transaction and Financing Activity Declined Further in May and Pricing Growth Slowed

Consumer Spending Rebounds, but States Remain Cautious

Consumer spending surged a record 8.2% during May as state officials lifted restrictions on businesses, demonstrating the strength of the consumer response as states progress with reopening. Already a dozen states have hit pause on restarting their economies as COVID-19 cases surge, and more could follow as 31 states saw new case levels trend upward last week. We expect next month’s release of June spending data to be strong but remain cautious about July spending. The end of July will represent another test for consumers when expanded unemployment benefits expire if Congress does not extend the program. The May Rebound Spending marked a dramatic reversal from the historic 12.6% decline registered in April. Consumer spending focused heavily on purchases of motor vehicles and recreational goods as well as services such as health care, food services, and accommodations. Fueling spending, household employment income increased 2.4% month-over-month, an encouraging sign as 2.5 million workers returned to work during the month. Overall income levels did decline 4.2% month-on-month, however, because of lower levels of government financial support compared to April when it issued one-time stimulus checks

For-Sale Housing Indicators Improving, but Vulnerabilities Remain

NAR’s pending home sales index, which typically leads existing home sales by one or two months, rebounded 44.3% over April levels. And the MBA’s purchase mortgage application index remains well above pre-pandemic and year-ago levels despite a 3.0% drop in the most recent weekly numbers. As expected, existing-home sales fell 9.7% during May. The 3.9 million existing-home sales in May represent the lowest monthly total since late 2010. However, given the positive pending sales data, the housing market is showing signs of improvement. It remains to be seen whether increases in home demand will be sustained beyond this summer. Many households are finding homeownership further out of reach than before amidst early signs that home prices continue to appreciate 5.5% YOY as of April. In addition to widespread job losses and income reductions, would-be home buyers now face more rigorous standards for mortgages. However, we expect pricing will remain robust with historically tight inventory levels and low mortgage rates providing lift to the housing market. In Bridge target markets, Minneapolis, Atlanta, and Washington, DC have seen the largest home price increases so far this year. Las Vegas, which has been particularly hard hit by the pandemic, is the only market to experience a price decline.

Year-to-Date Change in Median Sales Price by Metro Area

CRE Transaction and Financing Activity Declined Further in May and Pricing Growth Slowed

Commercial real estate transaction volume continued to slide in May after an already substantial drop in April as both buyers and sellers remained hesitant amidst uncertainty regarding the broader economic environment. Deal volume across sectors totaled $9.8 billion in May, according to the latest figures from Real Capital Analytics (RCA), a 79% YOY decrease and the lowest figure for any May in a decade. Declines in transaction activity for both multifamily and office properties trended closely with the overall CRE figure at approximately 80% each. Refinancing activity has also slowed but not to the same degree. This could translate into fewer distressed asset sales in the coming months if credit markets continue to operate at a similar pace and collections remain strong. RCA reports that overall refinancing activity declined 30% YOY in both April and May with owners largely able to obtain financing at reasonable terms. Commercial real estate prices are also beginning to show signs of disruption with RCA’s all-property index increasing only 4.9% year-on-year during May, the lowest level since 2011. With a limited set of transaction data, office experienced the slowest same-store price growth at 1.6% YOY while multifamily led the pack at 9.3% YOY.

Disclosures and Disclaimers
This is a general analysis of the real estate market prepared by Bridge Investment Group LLC (“Bridge”) and is not related to any specific products or services of Bridge or any affiliate. Sources for statistics and other factual data included herein are maintained by Bridge Research. Such data has not been verified by Bridge and we can give no assurance that it is accurate or complete. Statements contained herein that are nonfactual constitute opinions of Bridge, which are subject to change. Financial projections contained herein are estimates only and are based on assumptions, including assumptions regarding future rent growth, the availability and cost of financing, changes in market capitalization rates, and various micro- and macro-economic trends. No assurance can be given that either the projections or the assumptions will prove to be accurate. Investment in real estate involves substantial risk of loss.
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