Mortgage Economic Review: June 2020

The Mortgage Economic Review summarizes recent key economic Indicators, data and events that are important to mortgage and real estate professionals.

 

For the third consecutive month, Covid has dominated the news—and everyone's life—throughout the world. I have noticed that people are getting tired of hearing an endless string of depressing Covid statistics and commentaries. I call it "Covid Information Fatigue." Instead, this commentary will stay focused on the Economic Data that are Key Indicators for the Mortgage and Housing Markets.

 

This month's Economic Data Summary is almost all in the red, but there are some splashes of green. Signs of returning to normal are all around us: more traffic, more cars in parking lots, longer lines in stores, restaurants open with limited capacity, etc. Employment data is starting to improve (ever so slightly) as furloughed workers slowly return to work. This societal shock will permanently change people's behavior and future business plans. The U.S. economy is 70% consumer-driven. The big question is: How will this shock affect consumer behavior and consumption patterns in the recovery and aftermath? No one really knows at this point, but it will be essential for businesses to monitor consumption patterns so they can adjust their plans.

 

►The Federal Reserve reiterated they will do anything to help the economy recover
►U.S. GDP fell 5.0% in the first quarter of 2020
►Over 40,000,000 workers have filed unemployment claims since Covid hit
►Over 4,000,000 loans—8% of all mortgages—are now in forbearance
►U.S.-China tensions escalated over new security laws limiting Hong Kong's autonomy
►The 10-Year Treasury Security yield continues to hover around 0.7%

The Fed is going to do whatever it takes to get the economy back on its feet. Fed Chair, Jerome Powell, said on 60 Minutes: "The Fed hasn't run out of ammunition ... There's really no limit to what we can do in lending programs." Chairman Powell also said the economy could: “Recover steadily through the second half of this year.” That's assuming no Covid second wave. The April FOMC Minutes noted the Fed is prepared for more monetary and fiscal support "if the economic downturn persists.” One thing the Fed doesn't want is negative interest rates. They don't plan to allow Fed Funds to go negative. However, they haven't completely ruled out the possibility. The Fed also said they intend to keep Fed Funds Rates hovering near zero until the economy is "on track to achieve” maximum employment and 2% inflation.

 

Net Net: The Fed is already planning their next moves. Due to the uncertainty and future risks, they are making contingency plans for a number of different recovery scenarios, including a second wave, a slowed recovery, or stalled recovery. The next FOMC Meeting will be June 8th and 9th. 

 

As expected, Data on Home Sales Data this month is all in the red—except for new home sales, which showed a 0.6% rise. It's small, but it's green. Home prices are still in the green as they continue to rise. Realtors and loan officers are reporting that home sales are surprisingly brisk. Inventory is constrained because many potential sellers have postponed listing their homes due to the lockdown. The homes that are listed for sale are attracting buyers—especially first-time buyers, which comprised 36% of all purchase activity. Investors seem to be on the sidelines, accounting for only 10% of home purchases. Record low mortgage rates has helped affordability, especially for the first-time buyer.

 

Existing home sales (closed deals in April) fell 17.8% to an annual rate of 4,330,000 homes, down 17.2% in the last 12 months. The median price for all types of homes is now $286,800—up 7.4% from a year ago. The median single-family home price is $288,700 and $267,200 for a condo. First-time buyers were 36%, investors 10%, cash buyers 15%. Homes were on the market an average of 27 days, and 46% were on the market for less than a month. Currently, 1,470,000 homes are for sale, down 19.7% from 1,830,000 units a year ago.

 

New home sales (signed contracts in April) rose 0.6% to a seasonally adjusted annual rate of 623,000 homes—down 6.2% YoY. The median new home price was $309,900, and the average was $364,500. There are 325,000 new homes for sale, which is a 6.3 month supply.

 

►Pending Home Sales Index (signed contracts in April) fell 21.8% to 69.0, down 33.8% YoY.   

 

►Building Permits (issued in April) fell 20.8% to a seasonally adjusted annual rate of 1,074,000—down 19.20% YoY. Single Family Permits fell 24.30% to an annual pace of 669,000 units, down 16.4% YoY.     

 

►Housing Starts (excavation began in April) fell 30.2% to an annual adjusted rate of 891,000 units—down 29.7% YoY. Single-Family Starts fell 25.4% to 650,000 units—down 24.8% in the last 12 months.

 

►Housing Completions (issued in April) fell 8.1% to an annual adjusted rate of 1,176,000 - down 11.8% YoY. Single Family Completions fell 4.9% to 865,000 units - down 6.4% in the last 12 months.

 

►S&P/Case-Shiller 20 City Composite Home Price Index rose 0.47% in March, up 3.92% YoY.

 

►FHFA Home Price Index rose 0.1% in March, now up 5.7% YoY.

 

The Labor Market has taken the brunt of the Covid pandemic, and everyone knew April Employment Data was going to be awful. The Bureau of Labor Statistics (BLS) reported the economy lost 20,500,000 Jobs in April. That means the jobless rate quadrupled in 2 months from 3.5% in February to 14.7% in April. You might look at this data and think the math doesn't add up. At the beginning of 2020, we knew there were 156,000,000 workers in the Labor Force, and roughly 40,000,000 have filed for Unemployment Benefits since Covid hit. So: 40 / 156 = 25.6%. Shouldn't the Unemployment Rate be 25% percent? The "Official" Jobless Rate is probably understating the actual Unemployment Rate. Unemployment is a lagging indicator, and Labor Data right now is a fast-moving target.  Most Economists expect the Unemployment Rate to peak between 22% to 25% before things improve. The big question is: How long will Unemployment stay elevated? Hopefully, Unemployment peaked in May. There are a few bright spots in the May Labor Data: A) Many Employers received PPP Checks and rehired furloughed staff, B) weekly Unemployment Claims are dropping, and C) People who are working are making more money with increased wages and overtime. All eyes are glued on the next Jobs Report to be released Friday, June 5th.

 

►The Economy lost 20,500,000 Jobs in April

►The Unemployment Rate rose to 14.7% in April from 4.4% in March

►The Labor Force Participation Rate fell to 60.2% from 62.7% in March
►The Average Hourly Wage rose 4.7% in May, up 7.9% YoY

 

Inflation in the US and around the world nose-dived as the Covid Lockdown takes its toll on the Global Economy. A few months of negative CPI & PPI is a pullback. Several months is Deflation. Inflation is no longer a near term risk despite the massive government stimulus and low Interest Rates. The CPI dropped 0.8% in April due mostly to energy prices. Energy prices fell 10%, Gasoline prices fell 20%,  Airline Fares down 15%, clothes down 4.7%, Food & Beverages rose 1.4%, Shelter costs were flat. People who are laid off or working from home don't need new clothes, new cars, vacations, or traveling. They do need a roof over their head and food - and alcohol. Alcohol consumption is up - way up. The numbers are still a little fuzzy, but Liquor Sales are up an estimated 30 - 50% since the Covid Lockdown began.

 

►CPI fell 0.8%, up 0.3% in the last 12 months

►Core CPI (ex-food & energy) fell 0.4%, up 1.4% in the last 12 months
►PPI fell 1.3%, down 1.2% in the last 12 months
►Core PPI (ex-food & energy) fell 0.3%, up 0.6% in the last 12 months

 

The 2nd Estimate of 1st Quarter 2020 GDP showed the Economy contracted at a 5.0% annualized rate (4.8% expected). This is about the same estimate as last month but with a clearer picture. Inventories took a big hit as the global supply chain was disrupted, and Consumers stockpiled essentials. Spending on business equipment, structures, and software was down 7.9%. Corporate profits took a big hit, dropping 13.9% in the 1st quarter. Bankruptcy filings are up. Some familiar names that filed for BK in May: Pier One, JC Penney, J Crew.

 

Retail Sales plunged in April. Working from home means you don't need new clothes - or gasoline, or lunch at a restaurant, or a new car, or a used car, or new furniture.  All you need is groceries, computer equipment, an internet connection, medicine, Netflix, Hulu, etc. Consumers stopped buying just about everything, and Retail Sales broke records on the downside, but they will bounce back. In the meantime, Consumer Confidence and Sentiment increased. After 45 days in lockdown, people are starting to think the worst is behind them.

 

►Retail Sales fell 16.4% during April, now down 21.6% in the last 12 months

►Consumer Confidence Index rose to 86.6 from 69.9 the prior month          
►Consumer Sentiment Index (U of M ) rose to 73.7 from 71.8 the previous month

 

Tensions between China and other countries are increasing. Australia called for an investigation to determine the true origin of the Covid-19 virus. China retaliated by banning imports of meat from Australia and threatened to ban other imports such as barley, wine, dairy, etc. The EU warned China not to retaliate against countries that support the investigation.

 

►Oil Prices have recovered from their record lows. WTI Crude (West Texas Intermediate) is trading around $34/barrel, and Brent Crude is trading around $35/barrel.

►Oil demand in China has almost returned to Pre-Covid Levels.
►European oil demand is increasing as traffic picks up and resumes in Europe.
►Chinese Lawmakers passed a new Security Law, which bans secession, foreign interference, terrorism, subversion, etc. The new law vastly restricts Hong Kong's autonomy and independence.

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