Mortgage Economic Review: July 2020

With 2020 officially half over ... it's been a wild ride. In the first two weeks of June, the news was saturated with protests, rioting and looting. The last two weeks of June, the news coverage included the "spike" in new COVID cases as the economy re-opened. Most people expected a COVID "spike" to happen as the economy reopened.

 

My unscientific observation, as I venture out into stores, is that the reopening and recovery are real. Stores are relatively crowded with shoppers that have an upbeat attitude. People are also displaying a lot of common sense, courtesy and patience toward one another. I think they're just happy to get out of the house.

 

Economic data also was mostly positive. Retail sales had its own "spike," surging 17% as shoppers returned to stores. The incremental savings rate "spiked" to a record 23%—consumers have accumulated money to spend as the economy reopens. Demand for suburban homes is growing. Millennial urban renters are transitioning to suburban homeowners, as they look to the suburbs for more space and security.

►The Fed reiterated its message to keep Interest Rates low until the economy recovers

►The dollar retreated to its lowest level in a year
►The economy is reopening in phases with a corresponding increase in COVID cases
►The stock and bond markets continue to move sideways
►Protests, rioting and looting gripped major cities after the death of George Floyd in Minnesota
►First Quarter U.S. GDP final estimate showed the economy contracted by 5.0%
►The 10-Year Treasury Security yield continues to bounce around 0.7%

 

The June FOMC Meeting didn't provide any unexpected information. The FOMC Announcement reiterated what they have said for the last few months—that the economy faces "considerable risks" in the medium term, and they will do whatever it takes to get the economy back on track. Fed Chairman Powell stated on June 10: "We’re not even thinking about—thinking about raising rates …We are strongly committed to using our tools to do whatever we can for as long as it takes.”

 

He repeated the message again during his semi-annual policy report to Congress on June 16: “We are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible.”

 

The Fed is forecasting:

►Short-term interest rates at or near zero through 2022

►Fed Funds target range to be 0% to 0.25%
►GDP to contract 6.5% in 2020, but grow 5.0% in 2021
►Fourth Quarter Unemployment Rate of 9.3% and 6.5% in 2021
►The Fed will purchase $40 billion of MBS, and $80 billion of Treasury Securities every month

 
Net Net: The Fed's message has been clear and consistent for the last few months—they will keep interest rates low and use all the tools in their toolbox to help the economy recover. They expect the economy to take years to recover and unemployment to stay elevated until 2023.

The backdrop for housing is very upbeat, even though the housing data was mixed. Mortgage rates are at record lows, and homes that are listed for sale are quickly snatched up. The transition of millennials from renters to homeowners is in full swing. Motivated by COVID, urban unrest and low mortgage rates, millennial renters in urban areas are eyeing the safety and spaciousness of the suburbs. Low mortgage rates have helped affordability. The housing challenge now is inventory—there aren't enough homes for sale. Potential sellers have been reluctant to list their property because they don't want a stream of buyers traipsing through their home. Watch unemployment. If unemployment continues to stay elevated for an extended period of time, it could negatively impact the housing market. Unemployed people don't buy homes—even at these low rates.

 

►Existing-home sales (closed deals in May) fell 9.7% to an annual rate of 391,000 homes, down 26.6% in the last 12 months. The median price for all types of homes is now $284,600—up 2.3% from a year ago. The median single-family home price is $287,700 and $252,300 for a condo. First-time buyers were 34%, Investors 14%, Cash Buyers 17%. Homes were on the market an average of 26 days, and 58% were on the market for less than a month. Currently, 1,550,000 homes are for sale, down 18.8% from 1,910,000 units a year ago.

 

►New home sales (signed contracts in May) rose 16.6% to a seasonally adjusted annual rate of 676,000 homes - up 12.7% YoY. The median new home price was $317,900, and the average was $368,800. There are 318,000 New Homes for sale, which is a 5.6 month supply.

 

►Pending home sales index (signed contracts in May) rose 44.3%, down 10.4% YoY. 

 

►Building permits (issued in May) rose 14.4% to a seasonally adjusted annual rate of 1,220,000—down 8.8% YoY. Single-family permits rose 11.9% to an annual pace of 745,000 units, down 9.9% YoY.     

 

►Housing starts (excavation began in May) rose 4.3% to an annual adjusted rate of 974,000 units—down 23.2% YoY. Single-family starts rose 0.1% to 675,000 units—down 17.8% in the last 12 months.

 

►Housing completions (issued in May) fell 7.3% to an annual adjusted rate of 1,115,000—down 9.3% YoY. Single Family Completions fell 9.8% to 791,000 units - down 10.8% in the last 12 months.

 

►S&P/Case-Shiller 20 City Composite Home Price Index rose 0.3% in April, up 4.0% YoY.

 

►FHFA Home Price Index rose 0.2% in April, now up 5.5% YoY.

 

There is a lot of green in the employment data in June with the economy adding 2,509,000 Jobs in May. Many people expected the unemployment rate to rise to 20%, but happily, it didn't. Instead, it fell to 13.3%. You don't have to be an economist to know the labor market has taken the brunt of the COVID pandemic—and we can't get a recovery until people go back to work. Along with encouraging employment data comes discouraging COVID data. As employment increases, so do COVID cases. It's a precarious balancing act, and many economists fear the labor market will not fully recover until a vaccine is available. Be careful about overreacting to fluctuations in employment data. States have been struggling with the workload of unemployment claims and have made numerous reporting errors.

 

►The economy added 2,509,000 Jobs in May

►The unemployment rate fell to 13.3% in May from 14.7% in April                                                                                   

►The labor force participation rate rose to 60.8% in May from 60.2% in April
►The average hourly wage fell 1.0% in May after rising 4.7% in April, up 6.7% YoY

 

There was mixed inflation data in June as the consumer price index declined, but the producer price index rose. Expect inflation to return as consumers get out and spend the accumulated cash they have been saving—but that might not happen for several months.

 

Consumption patterns will change in the near term as less money is spent on vacations, travel and restaurants, while more money will be spent on houses, cars and groceries. Demand for travel and entertainment will slowly return as consumers become more comfortable in restaurants and public spaces.

 

►CPI fell 0.1%, up 0.1% in the last 12 months

►Core CPI (excluding-food & energy) fell 0.1%, up 1.2% in the last 12 months
►PPI rose 0.4%, down 0.8% in the last 12 months
►Core PPI (ex-food & energy) rose 0.1%, down 0.4% in the last 12 months

 

The third and final estimate of 1st Quarter 2020 GDP showed the economy contracted at a 5% annualized rate as expected. To keep that in perspective, the economy rose 2.1% in the last quarter of 2019. Remember, COVID didn't hit the U.S. until March. GDP gains in January and February were wiped out in March. Second Quarter GDP is April, May, and June, the peak of the lockdown. So expect it to be really ugly. The good news is that 2Q GDP is already behind us, but we haven't seen the data yet.

Retail sales bounced back rising 17.7%. Consumers are starting to spend the cash they saved during the lockdown. Savings accounts are at record highs, and that cash will eventually be used to pay down debt or buy stuff. What stuff did consumers buy in May—things to amuse themselves at home. Sporting goods were up 88%, furniture up 90%, electronics up 51%, clothing up 188%, autos & auto parts up 44% and building materials were up 11% as the home construction business picks up—always good news for the mortgage industry.

 

►Retail sales rose 17.7% during May, now down 6.1% in the last 12 months

►Consumer Confidence Index rose to 98.1 from 86.6 the prior month          
►Consumer Sentiment Index (U of M) fell to 78.1 from 78.9 the previous month 

►Oil prices continue to bounce around $40 a barrel. WTI Crude (West Texas Intermediate) is trading around $39/barrel, and Brent Crude is trading around $41/barrel.

►Gasoline demand in the US is back to about 80% of normal.
►Airline traffic is making a very slow recovery—about 20% of last year's passenger volume.
►Chinese exports fell 3.3% YoY, reflecting a lack of demand.
►Japanese exports fell 28.3% YoY—mostly cars and car parts.

 

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