Economy Could Shrink Upwards of 30% in Second Quarter
Professionals around the country continue to feel the lasting impact of the COVID-19 pandemic, as another 2.44 million people filed for unemployment during the week ending May 16. While the number of new claims has declined in recent weeks, the total amount remains staggering.
In housing news, the National Association of Home Builders released its Housing Market Index, which is a real-time read on builder confidence. While all components of the index (including present conditions, future expectations and prospective buyer traffic) improved from April to May, the figures are still understandably and significantly lower than they were in March.
Reports also showed that Housing Starts and Building Permits both plunged from March to April, as did sales of existing homes.
Fed chair Jerome Powell was in the news, appearing on 60 Minutes and testifying in front of the Senate. Of note, he said on 60 Minutes that the economy could shrink upwards of 30% in the second quarter. However, he does not see the economy entering another depression and he believes the US will get to “an even better place” than it was before the coronavirus hit, and that it “won’t take that long.”
Powell also testified that the Fed is “committed to using our full range of tools to support the economy in this challenging time even as we recognize that these actions are only a part of a broader public sector response.” He also said, not surprisingly, that rates will stay at zero “until we are confident that the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals.”
Lastly, there was some promising information at the start of the week from Moderna regarding its vaccine trials, as 45 participants produced COVID-19 antibodies. This is especially significant, given that 52% of small businesses in a recent survey said that they fear they would be out of business in 6 months or less if restrictions to reopen continue. Stocks responded favorably when the news was first reported and we will continue to monitor this story.
Unemployment Woes Continue
Another 2.44 million people filed for unemployment for the first time during the week ending May 16, which was in line with estimates. California (+246K), New York (+226K) and Florida (+224K) saw the largest gains.
Factoring in the number of new claims, continuing claims, and the amount of people in the labor force, we estimate that the unemployment rate is around 21.5%. However, when we estimate the number of new jobs the Paycheck Protection Program has temporarily created, we think that the unemployment rate could be closer to 24.7% without it.
April Existing Home Sales Plummet
The latest Existing Home Sales report, which measures closings in April and likely represents buyers shopping for homes in February and March, showed that sales decreased by 17.8% from March to April. This was the largest monthly drop since July 2010 when the home buyer tax credit, a federal stimulus resulting from the subprime mortgage crash, expired. Sales were also 17.2% lower when compared to April of last year.
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The median home price was reported at $286,800, up 7.4% year over year. Single family sales were down 16.9% compared to March, but condos saw a much bigger drop of 26.4%. This could start to show the migration from cities into suburbs.
Inventory was much tighter and remains a concern, as there were only 1.47 million units for sale in April, down 1.3% from March and a whopping 19.7% lower than last April.
At the current pace of sales, this represents a 4.1-month supply and is the lowest April
supply figure on record. This should be very supportive of prices, especially with demand remaining strong as evidenced by purchase application volume.
As NAR’s chief economist Lawrence Yun explained, “Record-low mortgage rates are likely to remain in place for the rest of the year, and will be the key factor driving housing demand as state economies steadily reopen. Still, more listings and increased home construction will be needed to tame price growth.”
And Speaking of Home Construction …
The National Association of Home Builders released its Housing Market Index, which is a real-time read on builder confidence, for the month of May. While the reading increased to 37 from 30 in April, it is just over half the 72 reading that was reported in March.
Diving deeper into the survey’s components, confidence in present conditions rose 6 points to 42 from April, versus 79 in March. Future expectations were up 10 points from April to 46, as compared with 75 in March, while prospective buyer traffic rose to 21 from 13 after reaching 56 in March. Keep in mind that 50 is the baseline, meaning anything above 50 signals expansion while below means contraction.
The NAHB said, “The fact that most states classified housing as an essential business during this crisis helped to keep many residential construction workers on the job, and this is reflected in our latest builder survey.” Also, “Low interest rates are helping to sustain demand.”
There is a caveat to all of this, though, namely, “High unemployment and supply side challenges including builder loan access and building material availability are near term limiting factors.”
Home construction figures were also released for April, with Housing Starts down 30% from March, the biggest percentage decline on record. Specifically, starts for single family homes dropped 25%. Building Permits, which are a sign of future construction, plunged 21% with single family permits down 24%.
While we can likely expect housing – the “economic driver” – to slow, the lack of supply as noted above will be supportive of home prices.
FHFA Update on Home Forbearance
The Federal Housing Finance Agency has announced that Fannie Mae and Freddie Mac borrowers in forbearance can apply for refinancing and new purchase mortgages once their loans are current. The policy waives a previous mandatory wait of 12 months, which will allow faster access to record-low rates.
According to the FHFA, borrowers are eligible to refi or purchase a new home if they are current on their mortgage in forbearance but continued to make mortgage payments or reinstated their mortgage. Borrowers are eligible to refinance or buy a new home three months after their forbearance ends and they have made three consecutive payments under their repayment plan, payment deferral option or loan modification.
“Homeowners who are in COVID-19 forbearance, but continue to make their mortgage payment, will not be penalized,” said FHFA Director Mark Calabria. “Today’s action allows homeowners to access record low mortgage rates and keeps the mortgage market functioning as efficiently as possible.”
Home Hack of the Week
With the start of summer less than a month away, spending time in your garden may be high on your to-do list. Here’s a great checklist you can follow from the folks at Better Homes & Gardens.
Bird feeders are no exception when it comes to needing a spring clean. If you haven’t done so already, wash and refill yours with fresh seeds for the season.
As your spring bulbs continue to flower, take note of any empty spots in which you may want to plant additional bulbs in the fall.
Annuals are great for providing pops of color throughout your yard as well as in containers on your front porch or back deck. Check local garden centers for the best options for your area and soil type. Fresh layers of mulch around your plants can also help minimize weeding over the summer.
Lastly, take a word of advice from moms and don’t forget your veggies. Tomatoes, peppers and herbs are great choices as the weather starts to warm in earnest.
What to Look for This Week
After the Monday market closures in honor of the Memorial Day holiday, the rest of the week is jam-packed with reports. Tuesday brings several key housing updates, including the Case-Shiller and FHFA home price indexes for March and New Home Sales for April, plus May Consumer Confidence.
The latest weekly Initial Jobless Claims will be critical to watch on Thursday, while April Durable Goods and the second estimate for 1Q GDP will provide important updates on the economy. Friday brings a wide range of news, including the final Consumer Sentiment numbers and manufacturing highlights via the Chicago PMI for May, and the Fed’s favorite measure of inflation, Personal Consumption Expenditures, along with Personal Income and Spending for April.
Technical Picture
The Fed continues to purchase Mortgage Backed Securities in line with its goal of stabilizing the markets. After falling below support at the 50-day Moving Average at the start of the week, MBS were able to rally and now continue to trade in the middle of a 53bp range between the aforementioned support and overhead resistance at the 25-day Moving Average.
The 10-year is in a similar position, being squeezed in a range between its 25 and 50-day Moving Averages, though it has been moving lower and testing the 25-day. This is related to the negative stochastic crossover on the stochastic chart. If Treasury yields break beneath the 25-day, we may see Mortgage Bonds move higher and follow suit.
