HSH MARKET TREND
June 19, 2020 –As we wend our way out of perhaps the strangest and most difficult spring in memory into what will likely be an odd summer, at least two significant issues will keep things from settling into the usual doldrums: The shape, strength and durability of the rebound in economic activity, and whether or not the spread of coronavirus can be managed, and if so, to what degree.
There are other issues that continue to drive things, too, not the least of which is politics, as it is an election year, but also social tensions that threaten to again boil over at any time.
This time of year is supposed to be full of events and celebrations; in May, it’s typically Moms and proms (long since canceled due to COVID-19) and in June it’s Dads and grads (also coronavirus distorted into drive-in or even remote functions). Weddings and parties and more, all kicked down the road at the very least, so this period feels rather quieter than usual.
As might have been expected, the reopening of state economies in May has resulted in an upsurge in new cases of coronavirus in a number of states, particularly those where enforcement of even basic protective measures such as wearing a mask in a closed space has been lax. Some would say “told you so!”, and new concerns about a “second wave” for the outbreak have appeared. Truth be told, it’s not a second wave, but more like a component of the first; a second wave may come in the fall. Regardless, concerns about the respread of disease have damped investor moods anew in recent days, tempering the level of enthusiasm that might have been seen given signs of a rebounding economy.
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Among data pointing to a recovery was a stout increase in retail sales for May. After posting the largest monthly decline on record in April of 14.7%, sales reversed course hard last month, rising 17.7%, the largest gain on record. Even so-called “core” retail sales (which leave out high-ticket items like autos and erratic sales at gasoline stations) sported a 12.4% lift, so it is clear that as things open that people are looking to spend. Some of this boost is “catch up”, of sorts; for example, sales at apparel retailers rose by 188% as folks ventured out to buy summer clothing en masse. Such a spurt also likely reflects increases in disposable income from expanded unemployment benefits and CARES-Act stimulus checks and savings from both. While such a strong gain is not likely to be repeated, retailers are no doubt tying to attract as many shoppers as they can and welcome the chance to try to fill in the revenue hole of the last few months. There remains a ways to go, too, since even with the improvement, sales this May were still some 6.1% below year-ago levels (and “core” -3.9% year-over-year).
A couple of looks at regional manufacturing activity also found rapid improvement on a month-to-month basis. The Federal Reserve Banks of Philadelphia and New York chimed in with their local reports for June this week, and the resumption in activity for both the third and second Fed districts was quite clear. In the New York region, the Fed’s headline indicator rose 29.4 points to land at just -0.2 for June; although activity is still declining, it is only barely declining, and the figure is within shouting distance of where it was when we turned the year. Sub-indexes covering new orders (-0.6) and employment (-3.5) are also greatly improved over where they were in April and May and have a chance to turn positive as New York continues its phased reopening.
Just next door, the Philadelphia Fed’s report was not only improved, but even impressive. In a stunning shift, the headline indicator stormed higher by 70.6 points to land at a positive 27.5, with new orders rising by 42.4 points from -25.7 to +16.7, and while employment didn’t make it out of the red, it did rise smartly, gaining 11 points but landing at -4.3 for the month. Other regional reports come next week, and we’ll get a better sense if the June pickup in activity was only localized or perhaps more widespread.
As manufacturing started to pick up a bit in May, it helped lift overall Industrial Production out of the doldrums. Significant declines in March and especially April gave way to a 1.4% increase for May, pushed higher by a 3.8% increase in manufacturing output, which should take back a bit of the previous two month’s declines. Production would have been stronger but was dragged backward by sagging mining production, which fell by 6.1%; this was a fourth consecutive fall, largely caused by depressed oil prices (which have since rebounded) and slack utility output (-2.3%) from so many places being closed during the month. Utility output should pick up again quickly as things re-open. With the increase, the percentage of industrial shop floors in active use edged up by 0.8% to just 64.8%, so there is plenty of unused capacity available to ramp up production if or when demand returns in force.
By all indications, the housing market weathered the COVID-19 shutdowns fairly well. If not for the hard economic stop and now continuing disruption, we were probably looking at the best spring housing market in a while, as mortgage rates were already near historic lows and the record-long string of job and income gains were helping to create plenty of demand. That said, with the disruption to incomes and more, a number of folks will not be participating in the housing market for a while at least. However, there seems to be plenty of pent-up and delayed demand for homes to buy, as even with still-rising home prices, the repeated call of “record low mortgage rates” continues to bring potential buyers into the market. What’s less clear is if that demand will be met by supply, as inventories of existing homes for sale remain razor thin.
This means improving opportunities for the new construction market, and reflective of this was an improvement in moods of home builders in June. The National Association of Home Builders Housing Market Index (HMI) moved back onto the positive side of the ledger, climbing 21 points to a value of 58 for the month. Sales of single-family homes also rose 21 points to 63, a value considered to be very strong, if not robust; the measure covering expected demand in the coming six-month period flared 22 points higher to 68, also fairly robust, but traffic at model homes and showrooms remained sub-par even with a 22-point leap. At 43, is it seven points below the breakeven level of 50, but it may be that social distancing is still keeping some potential buyers away from physical locations at the moment.
Still, builders will likely be cautious for a time, and at last blush, they had more than an ample supply of already-built stock to sell before they might need to start a faster pace of construction. Housing starts did rise in May, by a reasonable 4.3% to a 974,000 annualized rate of home construction, but this was rather below consensus expectations. Single family starts edged higher by just 0.1% to 675,000 units, but multifamily starts managed a 15% jump. Optimism about tomorrow’s new home market was evident, too, as permits for future construction leapt by 14.4% to 1.220 million (annualized) units. Although all these figures remain far below where they were pre-pandemic, they are moving in the right direction again, and that’s a positive thing.
Of course, building and permitting are one thing; selling is another. We’ll find out about sales of both new and existing homes in May next week; given the builder’s demeanor, it’s likely that new construction sales picked up to a greater degree than will existing sales. Part of that is due to the way the data are gathered; existing homes are tallied as sold when the deed changes hands, while new home sales are based on the date the contract is signed, so one reflects demand conditions 45-60 days prior (March-April, during the worst of the crisis so far) versus actual demand for new houses in the month of May (when things had begun to re-open in a number of locales).
Demand for purchase-money mortgages continues to rise, though, and that can’t all be attributed to new-house purchases. The Mortgage Bankers Association reported that in the week ending June 12, mortgage applications overall rose by 8%, powered by a 3.5% increase in applications for purchase mortgages. This continued a nine-week string of gains that has now moved the purchase index to an 11-year high, according to the trade group. Homeowners have begun to notice that mortgage rates have touched record lows again and again in recent weeks, and applications for refinances popped up by another 10.3% in the latest week.
Rising mortgage applications certainly indicate plenty of demand, but what’s not clear is the success rate of applicants — that is, how many actually make it through to an actual closing. Given somewhat more rigid underwriting standards in place in recent weeks due to mortgage market disruption, economic turmoil and lenders looking to meter inbound demand, this number is likely considerably higher than it had been just a few months ago. As well, we don’t know how many of these applicants that are turned down at one outlet are reapplying at another lender in hopes of finding a greater level of accommodation, so applications for mortgage credit might also appear somewhat higher than they actually are. One borrower, multiple applications.
That economic activity resumed in May after an awful April was reflected in the latest measure of Leading Economic Indicators from the Conference Board. At a value of 2.8, the May reading was 0.5 points higher than forecast and pretty strong, but the top-line figure may be masking underlying weakness since the biggest component was May’s unexpected and significant increase in hiring. Other inputs into the indicator remained pretty subdued. Still, improvement is improvement, regardless of the source, and the stronger-than-expected bump may actually provide a little economic momentum into June if not beyond. Certainly, the economy needs all the boost it can get; even with improved data for May supporting GDP growth, the current estimated run rate for second quarter GDP is a truly bleak -45.5%, according to the Atlanta Fed’s GDPNow tracking tool. While that’s better than the -54 and change of just a few weeks ago, it’s only marginally improved at best.
With varying support programs in place and yet-ongoing issues managing the number of claims in many states it’s a little difficult to know what’s actually happening with the labor market at the moment. In the week ending June 13, initial claims edged downward to 1.508 million new applications processed, a figure that is the lowest of the pandemic period to date, but one that remains very high by any historical reference. Continuing claims being paid also barely edged downward, from 20.6 million to 20.5 in the latest available data week (June 6). Has the once-rapid improvement in the labor market stalled? Is the still-elevated initial claims figure indicative of truly new claims, or are these folks who tried to apply weeks or even months ago finally getting in the systems? The answer isn’t really clear. What is clear is that we will need to see a faster rate of improvement in the weeks ahead for both initial and ongoing claims if the economy is to get on its feet for the third quarter.
Mortgage rates set a new record low this week, something we wrote about expecting just a few weeks ago. Time was when new record lows would have seen 40-point headlines and lots of discussion in the media and beyond, but we have set new records a number of times in just the last 10 years, so that story is a bit old, as it were. As well, most consumers also know that a new record doesn’t necessarily mean a meaningful change in rates; after all, it’s not as though rates were 4% yesterday and 3% today. While of course a milestone, the difference between the record of a few weeks ago and the one set this week is measured in hundredths of a percentage point — two, in fact — a technical record, but not a meaningful one.
In addition, the record applies to just one facet of the mortgage market — a conforming fixed-rate loan made to an excellent credit quality borrower with a significant downpayment, full income and asset documentation and more. For other borrowers with lesser or differing credentials, rates may or may not be at record lows, and for some, credit simply isn’t available regardless of price. For these borrowers, 40-point headlines of “record low mortgage rates” can be pretty meaningless. Still, benchmarks are what they are and what we have to go by, so the reference still has value, even if in reality such new records are being set because the economic climate is quite awful and inflation benign.
The downdraft in mortgage rates from last week to this appears to have paused, at least for the moment. After barely catching up from a refinance blast pre-shutdown, activity in mortgages has been steady to now increasing again, and the economic picture is mixed to a bit better of late. That suggests a flat mortgage rate environment as we head into next week, and we think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday morning will be mostly steady, perhaps increasing by a basis point or two if there is any movement.