Mortgage Rates Remain Flat, Housing Demand is High and Forbearance is not Forgiveness

Weekly Update – 6/25/2020

After the Great Recession, it took more than ten years for purchase demand to rebound to pre-recession levels, but in this crisis, it took less than ten weeks. The rebound in purchase demand partly reflects deferred sales as well as continued interest from prospective buyers looking to take advantage of the low mortgage rate environment.

A Word on Forbearance

Black Knight Financial Services, a data and analytics solutions firm serving the mortgage and title insurance industries, announced that forbearance requests are up 79,000 from last week. This erases roughly half of the improvement seen since the peak of these requests about three weeks ago and have been increasing every day for the past five business days. Currently, 4.68 million homeowners are in forbearance, representing approximately 8.8% of all active mortgages.

As a reminder, forbearance does not equal forgiveness. If you believe that you need forbearance, please contact your mortgage servicer (the name on your mortgage statement) and have a frank and honest discussion with them. Some folks believe that they’ll just tack on the missed payments to the end of the loan. Maybe. Be sure you understand what you are obligating yourself to before you decide. In some instances, the mortgage servicer or holder of your note will expect to be paid in full when you are ready to come out of forbearance. That could mean three months (or more), plus your current month’s payment, which could be several thousand dollars. And if you are thinking that you’ll just refinance into another loan, most lenders require 12 on time payments. If you’ve been in forbearance, your payments were not made on time. This might make refinancing difficult, if not impossible. Forbearance is an incredibly powerful tool and for those that truly need it, it can be a lifesaver. Just be sure you have something in writing and you are clear about your obligations before you choose this option.

Unemployment Claims on the Uptick

More people filed for unemployment than expected during the week ending June 20, with first-time filers totaling another 1.48 million people. This was higher than estimates and still reflects an estimated 16% unemployment rate.

The housing sector was also in the news, with sales of existing homes declining slightly more than expected from April to May. New Home Sales, meanwhile, increased 16.6% in May, though April’s figure was revised lower. There is an easy explanation for the difference between the two reports, as detailed below.

Inventory remains tight for both new and existing homes, which should be supportive of home prices.

Speaking of home prices, the FHFA (Federal Housing Finance Agency) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Home prices rose 0.2% in April and 5.5% year over year, down from 5.9% in the previous report.

Lastly, the final reading for first quarter GDP came in at the third worst reading ever, with second quarter’s reading expected to be much worse. There was some positive news, though, as orders for Durable Goods (which reflects new orders placed with domestic manufacturers for delivery of factory hard goods) were up 15.8% in May, which was much stronger than the 0.0% expected and also higher than the prior month’s -17.2% reading. And the Fed’s favorite inflation measure, Personal Consumption Expenditures, showed that inflation remained tame in May.

The Latest on Unemployment 

Another 1.48 million people filed for unemployment benefits for the first time during the week ending June 20, which was 100,000 more people than anticipated. California (+287K), Georgia (+124K) and New York (+90K) saw the largest gains.

Continuing claims, which measure people continuing to receive benefits, decreased by only 77,000 to 19.5 million people. This figure is backwards looking, so when we add the following two weeks of initial claims, there are roughly 22.5 million individuals receiving benefits. Note that this does not include anyone who returned to work within the last week.

If we factor in a similar number of people who returned to work from the previous week’s report, we estimate the unemployment rate to be around 16%. Although there has been a slight improvement in weekly claims, 1.48 million is still a huge number of people who have lost their jobs and are new filers for benefits.

The Skinny on May Home Sales

Existing Home Sales decreased by 9.7% from April to May, slightly worse than the 8.8% decline that was expected. Sales were also 26.6% lower when compared to May of last year.

Inventory remained tight with only 1.55 million units for sale in May. While this was 18.8% lower year over year, the number was 6.2% above the levels seen in April. At the current pace of sales, this represents a 4.8-month supply, below the 6-month level that’s considered normal. Low inventory should be supportive of prices, especially with demand remaining strong as evidenced by purchase application volume.

The median home price was reported at $284,600, up 2.3% year over year. Single family sales were down 9.4% from April to May. Condos, however, saw a much bigger drop of 12.8% and a whopping 41% decline from a year ago, confirming that people are looking for standalone homes. First time home buyers made up 34% of home sales.

Lawrence Yun, NAR’s chief economist, explained, “Sales completed in May reflect contract signings in March and April – during the strictest times of the pandemic lock down and hence the cyclical low point. Home sales will surely rise in the upcoming months with the economy reopening and could even surpass one-year-ago figures in the second half of the year.”

Meanwhile, sales of new homes rose 16.6% in May, much higher than the 1.6% increase that was expected. Sales were also up 12.7% when compared to May of last year. It should be noted that April’s sales figure was revised lower from 623,000 to 580,000, but even without the revision sales in May were up 8.5%.

Inventory of new homes on the market also remains tight, decreasing from 325,000 to 318,000, while the median new home price increased 4.9% to $317,900.

You may be wondering why sales of existing homes were down significantly while sales of new homes had a nice rebound. The answer is partly due to what each report is measuring. As noted above, May’s Existing Home Sales report measured closings in May, meaning those buyers were home shopping in March and April – the worst time for the pandemic. 

May’s New Home Sales report, on the other hand, measures contracts that were signed in May by people out shopping for homes throughout that month. The increase in states opening in May plus the high demand for housing helps explain the difference between the two reports.

The Scoop on GDP

The final or third look at first quarter GDP was reported at -5%, which was unchanged from the second reading and the third worst reading ever. Remember this is for the first quarter. The second quarter of 2020 will likely be much worse, with economists forecasting a much bigger GDP drop of around 30%.

Meanwhile, the International Monetary Fund projected global growth to be -4.9% in

2020, which is a drop of 2% from their previous forecast in April. Though the IMF projects a rebound of 5.4% in 2021, that will not recoup the loss that’s expected in 2020 because the recovery will be starting from a lower level.

The IMF said that $10.7 trillion in fiscal measures have been announced worldwide to fight the pandemic. As a result, global public debt is expected to reach an all-time high, exceeding 101% of GDP in 2020-21. That’s 19 percentage points above a year ago. This increase in global debt slows down the velocity of money and has a downward pressure on rates.

A Quick Update on Inflation

Personal Consumption Expenditures, the Fed’s favored measure of inflation, showed that inflation remains tame, as headline inflation increased 0.1% in May and fell from 0.6% to 0.5% year over year. The Core rate, which strips out volatile food and energy prices, also increased 0.1% in May and remained at 1.0% year over year.

Also of note, personal incomes fell 4.2% in May. Spending, meanwhile, increased by 8.2%, which was likely due to more states opening and the availability of places for people to spend money.

What to Look for This Week

The holiday-shortened week is jam packed with a wide range of reports. Housing news kicks off the week with May’s Pending Home Sales on Monday and the Case-Shiller Home Price Index for April on Tuesday. We’ll also get a read on June manufacturing numbers via the Chicago PMI on Tuesday and the ISM Index on Wednesday.

It’s also a busy week for the labor sector, as the ADP Employment numbers for June will be released Wednesday, while the latest weekly Initial Jobless Claims will be reported as usual on Thursday. The Bureau of Labor Statistics Jobs Report for June will also be delivered Thursday instead of its usual Friday release, as all markets will be closed on Friday in observance of the Independence Day holiday.

Technical Picture

The Fed continues to stabilize the markets with their ongoing purchases of Mortgage Backed Securities. After trading in a tight range between support at their 25-day Moving Average and resistance at their 50-day Moving Average, Mortgage Bonds were finally able to break free and move convincingly above their 50-day. Meanwhile, the 10-year Treasury broke beneath its 50-day Moving Average, with additional room to improve

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.