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Mortgage Economic Review: May 2020

Mark Paoletti
May 05, 2020

The news in April was a relentless bombardment of scary health statistics and ugly Economic Data. I won't dwell on what you have already heard. Instead, let's consider the different recovery scenarios and challenges we will face as we return to a New Normal.  
Re-starting the economy is slowly beginning, but what shape will the recovery take: V, U, W, or L shaped. No one really knows. A V-shaped recovery will see the economy quickly bounce back in a few months. That would be great, but it's unlikely. An L-shaped recovery will have the economy linger at the bottom for many months or years. That's very bad, but also unlikely—the American spirit is too resilient to let that happen.
A U or W is the probable shape of the recovery. During uncertainty, hope for the best but prepare for the worst. Hope for a V-shaped recovery, but prepare for an L. It's too soon to predict the recovery shape or New Normal. One topic that hasn't been discussed—and we need to prepare for—is economic PTSD.
The country and world will be suffering from a collective PTSD for some time. Nothing survives a trauma like this without lasting scars. The economic scars will linger in society and broadly affect all aspects of economic life—the financial market, housing market, mortgage market, labor market, politics, geopolitics, and especially consumer behavior—for a long time. It's not fun to talk about, but as mortgage professionals, we need to be prepared for the effects of economic PTSD on home buyers and mortgage borrowers. 
One of those lingering issues will be the loans in forbearance. The numbers are still growing, but so far, about 7.0% or 3,500,000 loans are in forbearance. Forbearance is not forgiveness. Borrowers that skip payments will eventually have to make them up. Depending on the loan type, several options are available. Some can be onerous, and I suspect more options will become available as this crisis drags on.

Key Economic Data and Events in April 2020

►The longest economic expansion in U.S. history has ended
►First quarter GDP fell 4.8%—marking the official start of a recession
►The economy lost 701,000 jobs in March
►Roughly 30,000,000 workers applied for unemployment benefits in March and April
►Nearly 3.5 million mortgage borrowers have applied for forbearance so far
►Congress passed the Interim Emergency Bill which added $484B to the Cares Act 
►The Federal Reserve rolled out more credit facilities to support the economy

Interest Rates and Fed Watch 

When it comes to fighting the Covid Economic War, the Fed has plenty of artillery—and they are not afraid to use it. The Fed rolled out more Credit Facilities in April providing another $2.3T in loans. Chairman Powell reiterated how the Fed views its role: "to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible." The latest FOMC Meeting on April 29th was uneventful and was used to reiterate its support for the Economy and the new Credit Facilities it provided earlier in April. The new Credit Facilities include:
►Paycheck Protection Program Liquidity Facility (PPPLF) for lenders that originate PPP loans
►Secondary Market Corporate Credit Facilities (SMCCF) to purchase Corporate bonds
►Municipal Liquidity Facility (MLF) for loans to states and municipalities
►Main Street Lending Program for loans to medium-sized firms with up to 10,000 employees
►Expanded the Term Asset-Backed Securities Loan Facility (TALF) to purchase securities backed by commercial real estate loans, student loans, car loans, credit card loans, and junk bonds

Housing Market Data Released in April 2020

As expected, the Housing Data is all in the red, so no additional comments are needed. It will probably be like this for a few months before the numbers improve. Home prices are still trending up—for now.
Existing Home Sales (closed deals in March) fell 8.5% to an annual rate of 5,270,000 homes, up 0.8% in the last 12 months. The median price for all types of homes is now $280,600—up 8.0% from a year ago. The median Single Family Home price is $282,500 and $263,400 for a condo. First Time Buyers were 34%, Investors 13%, Cash Buyers 19%. Homes were on the market an average of 29 days, and 52% were on the market for less than a month. Currently, 1,500,000 homes are for sale, down 10.2% from 1,670,000 units a year ago.
New Home Sales (signed contracts in March) fell 15.4% to a seasonally adjusted annual rate of 627,000 homes - down 9.5% YoY. The median New Home price was $321,400, and the average was $375,300. There are 333,000 New Homes for sale, which is a 6.4 month supply.
►Pending Home Sales Index (signed contracts in March) fell 20.8% to 88.2, down 14.5% YoY.   
►Building Permits (issued in March) fell 6.8% to a seasonally adjusted annual rate of 1,353,000 - up 5.0% YoY. Single Family Permits fell 12.0% to an annual pace of 844,000 units, up 8.7% YoY.     
►Housing Starts (excavation began in March) fell 22.3% to an annual adjusted rate of 1,216,000 units - up 1.4% YoY. Single-Family Starts fell 17.5% to 856,000 units - up 2.8% in the last 12 months. 
►Housing Completions (issued in March) fell 6.1% to an annual adjusted rate of 1,227,000 - down 9.0% YoY. Single Family Completions fell 15.0% to 863,000 units - down 10.2% in the last 12 months.
►S&P/Case-Shiller 20 City Composite Home Price Index rose 0.45% in February, up 3.47% YoY. 
►FHFA Home Price Index rose 0.7 % in February, now up 7.2% YoY.

Labor Market Economic Data Released in April 2020

As expected, the Labor Data is getting uglier. The latest Jobs Report showed the economy lost 701,000 jobs in March. From March 15 to April 30, roughly 30,000,000 workers filed unemployment claims. To put things in perspective, before Covid-19 hit, the U.S. economy employed about 150,000,000 workers. Nearly 30,000,000 workers are 20% of the labor force. The hospitality sector (bars, restaurants, hotels) employs about 16,000,000. If 90% of them get laid off, that sector alone will increase the unemployment rate by 10%. Add layoffs in other industries, and the unemployment rate could peak at 25% before people start returning to work. People don't buy homes when they don't feel secure in their jobs, so this economic shock will probably dampen housing demand for the rest of 2020. Everyone is now holding their breath waiting for the next jobs report, which will be released on Friday morning, May 8th.
►The economy lost 701,000 jobs in March
►The unemployment rate rose to 4.4% in March, from 3.5% in February
►The Labor Force Participation Rate fell to 62.7% in March from 63.4% in February
►The Average Hourly Wage rose 0.4% in March, up 3.1% YoY

Inflation Economic Data Released in April 2020

Inflation took a sharp turn south in March. Prices of almost everything dropped, but Oil prices fell off a cliff. As everybody "shelters in place," people aren't flying or driving, so gasoline prices have plummeted and are still dropping. Food prices were up 0.3% as people stocked up at grocery stores. The cost of medical care rose 0.5% in March, now up 5.5% in the last 12 months. The data on car prices is interesting. Used car prices have been soft all year, but jumped 0.8% in March, while new car prices fell 0.4%. Clothing continues to get cheaper, with Apparel prices down a full 2.0% in March and down 1.6% YoY.
►CPI fell 0.4%, up 1.5% in the last 12 months
►Core CPI (ex-food & energy) fell 0.1%, up 2.1% in the last 12 months
►PPI fell 0.2%, up 0.7% in the last 12 months
►Core PPI (ex-food & energy) rose 0.2%, up 1.4% in the last 12 months

GDP Economic Data Released in April 2020

The First Estimate of 1st Quarter 2020 GDP showed the economy contracted at a 4.8% annualized rate (4.0% expected). This officially puts the economy in a recession and ends the longest economic expansion in U.S. history. Take this number with a grain of salt. The first GDP estimate can be unreliable. The true extent of the contraction won't be known until 2nd quarter GDP data comes out in July. The last time we saw a contraction like this was 2008 during the Financial Crisis: 4Q2008 GDP fell 8.4%, and 1Q2009 GDP fell 4.4%. Unfortunately, this is only the first glimpse of the damage. 2Q GDP data will give us a clearer picture. 

Consumer Economic Data Released in April 2020

No surprises in the Consumer Data this month, as Retails Sales, Consumer Confidence, and Consumer Sentiments all did a nose-dive. Grocery stores did bang-up business as sales rocketed to the highest level - ever - as Consumers stockpiled food. Online retailers had a great month. This data reflects March activity, so get ready for the April numbers to be lower.
►Retail Sales fell 8.4% during March, now down 6.2% in the last 12 months
►Consumer Confidence Index fell to 69.9 from 120.0 the prior month          
►Consumer Sentiment Index (U of M ) fell to 71.8 from 89.1 the prior month

Energy, International, and Things You May Have Missed 

Oil prices fell off a cliff, but are climbing back. Prices briefly went negative in April as tankers sat offshore with no place to unload their oil because storage facilities were full. Oil prices are now on an upswing.
►As of Monday May 4, West Texas Intermediate Crude (WTI) is trading around $21 a barrel, and North Sea Brent Crude is around $27 a barrel.
►Russia and Saudi Arabia made peace and agreed to cut oil production
►U.S. Trade Declined $13.9 Billion in March: Imported goods fell $4.76B (mostly autos, parts, & consumer goods), while exported goods fell $9.1B (mostly autos, parts, industrial, and capital goods)
►Many companies have suspended or canceled dividends in an attempt to preserve cash
►The US cut funding to the World Health Organization due to its early mishandling of the outbreak

The monthly Mortgage Economic Review is a concise summary of Key Economic Data that influence the Mortgage and Real Estate Industries. It is a quick read that helps Mortgage Professionals stay updated on important Economic Information that affects their industry. Feel free to share this with friends and colleagues in the Mortgage and Real Estate industry. This newsletter is for informational and educational purposes only and should not be construed as investment, legal, financial, or mortgage advice. The information is gathered from sources believed to be credible, some is opinion based and editorial in nature. Mortgage Elements Inc does not guarantee or warrant its accuracy or completeness, and there is no guarantee it is without errors. This newsletter is created for use by Mortgage and Real Estate Professionals and is not an advertisement to extend credit or solicit mortgage originations.

Mark Paoletti, president and founder of, may be reached by e-mail at [email protected].

May 05, 2020