Housing Recovery “V” For Now

Ny HSH Market Trend

August 21, 2020 — The resiliency of the housing market coming out of the pandemic lockdown is on full display this week, and we’ll probably see a little bit more of that next week, too. Leading up to the pandemic, low and still-falling mortgage rates had already been driving demand into the housing market, a trend that was keyed by the Fed’s slashing of rates in the latter half of 2019 to try and offset an economy that was flagging due to trade troubles. Home sales had begun to kick higher in the last couple of months of the year, and helped by a warm winter, the spring housing season for both existing and new homes seemed to be getting an early start in 2020.

Then came the coronavirus outbreak, and the hard-stop of economic activity. Over a span of a few months, sales of new homes dropped more than 25%, and sales of existing homes slumped by about 32% as folks were concerned about venturing out to see homes and sellers were reluctant to let folks wander in their houses. Uncertainty over jobs and incomes and a rough period in the stock market and more was likely to blame for the drop in new home sales, but regardless of the reasons, sales pulled back.

Over this time, the demand for housing became pent-up, and perhaps even enhanced somewhat by mortgage rates sliding to new record low levels on several occasions. As we’ve come to understand to a greater degree, the COVID-19 shutdown and economic interruptions have hurt folks of moderate means to a greater degree (and still are), but the reality is that relatively few of this most affected group were likely to be homebuyers in the near term. As such, their inability to engage the market hasn’t had much of a damping effect on sales, at least so far. 

The otherwise pent-up demand for housing has been or is being expressed, and what would likely have been a robust spring housing season became a robust summer housing season, and will probably help the fall to be a pretty solid affair, too. Debt and other concerns aside, the demographics are supportive of demand, as millennials are in their prime homebuying years. As well, there is purportedly a new exodus out of the condensed spaces of major metro areas into the suburbs (and beyond) happening, arguably due to coronavirus-related work changes, fewer amenities available in cities due to partial or complete closures of shops/restaurants/museums, etc. In some areas there is also a difficult political climate or rising lawlessness providing additional impetus to move elsewhere.

With these factors in mind, sales of existing homes bounced 24.7% higher in July, according to the National Association of Realtors, following up on a 20.2% jump in June in smart fashion. With the increase, the annualized rate of sale moved to 5.86 million, the highest level since late 2006, and the gain completed a “V” shape that spanned the last six months, with February (the other leg) sporting a 5.76 million pace. Of course, the rest of the existing housing story is again familiar; inventories of homes available to buy thinned out again to just 3.1 months at the present rate of sale, again close to a record low. Juiced by demand, prices of existing homes — which had cooled back in 2019 to a more moderate pace — re-accelerated to levels seen earlier this year, posting a year-over-year rise of 8.5%, and landing at a new record high median price of $304,100 for the month.

In this case, lower mortgage rates are both the cause of the demand that sparked prices and the cure for them. With existing home sales being tallied in the month in which the deal closes, July’s figures represent contracts being signed in late May and June. A median price some $10,000 higher in July compared to June only meant an increase in monthly payment of perhaps $20, as a decline in mortgage rates helped provide a partial or perhaps even a complete offset. With lower mortgage rates still in July and into August, odds favor more upward pressure for prices amid little inventory to purchase, but this combination — higher prices, nothing to buy — ultimately has a throttling effect on sales of existing homes. We saw that kind of tempered market back in 2018 and into 2019. 

Although we won’t see what happened with sales of new homes in July until next week, all signs point to a very solid month. The National Association of Home Builders released its August Housing Market Index; at a value of 78, it is now at an all-time high (spanning 35 years). Sales of single-family homes moved up to 84, a 22-year high (and just 2 points below the record); expectations for sales over the next moved up to 78, a very robust level, and the measure of traffic at showrooms and model homes popped 8 points higher to an all-time high of 65. Builders are ebullient, and should be; Even with a long uptrend in sales of new homes the pace of construction and sales still has a good bit of upside available to get back to what might be considered a “normal” pace. 

Busy builders are happy builders, and we saw a 22.6% increase in housing starts for July, which came after a surges of 17.5% in June and 11.1% in May. Starts have nearly returned to pre-pandemic levels and are now running at a level closer to pre-pandemic times, with a 1.496 million annual rate of construction. Not a perfect “V” shape, but pretty close. Starts of single-family homes flared higher by 8.2% to a 940,000 clip, but multifamily starts sported a 58.4% increase, jumping to 556,000 annualized units. Permits for future building surged, too, rising 18.8% to 1.495 million for the month. Single-family permits rose 17% to 983,000 and multifamily 22.5% to 512,000 for the month, so builders are not only busy now, they expect to continue to be well into the months ahead.

But what could temper these rosier sales and outlooks? An economy that struggles to get into a higher gear. Yes, growth in the third quarter will show a significant rebound compared to the gaping hole of the second, but that won’t change the reality of millions of folks out of work, or that there are extraordinary supports underpinning financial markets, or that without another round (or more) of fiscal stimulus and perhaps even more monetary policy accommodation that the risks of relapse into recession is very substantial. 

The Fed has taken extraordinary, unprecedented steps already, and has been successful in many ways. In the minutes of the late July meeting, the central bank noted that “market functioning across a number of market segments remained stable at significantly improved levels. In Treasury and agency mortgage-backed securities (MBS) markets, many market functioning indicators had returned to levels prevailing before the pandemic, and, as a result, purchases were conducted at the minimum pace directed by the Committee. Importantly, with conditions in MBS markets continuing to stabilize, primary mortgage rates fell to historically low levels over the intermeeting period.”

The Fed also noted that “Substantial fiscal policy measures – both enacted and anticipated – along with appreciable support from monetary policy and the Federal Reserve’s liquidity and lending facilities were expected to continue bolstering the economic recovery, although a complete recovery was not expected by year-end.” That said, the Congress is still busy arguing over what kind of stimulus is warranted, and how much, and who gets the support, but the Fed acknowledged that “additional fiscal aid would likely be important for supporting vulnerable families, and thus the economy more broadly, in the period ahead.” 

What more can the Fed do? At least a few things are on the table: “A number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point.” This could take the form of either “outcome-based” (e.g. growth, joblessness or inflation reach certain targets) or “calendar-based” approaches, where the Fed pledges to keep rates low for a given time period. Both have been used before with useful effect; alternative methods of keeping rates at a given desired level probably won’t be utilized anytime soon, as “many participants judged that yield caps and targets were not warranted in the current environment but should remain an option that the Committee could reassess in the future if circumstances changed markedly.” This approach and other things such as a negative policy interest rate are probably not going to happen — or at least the Fed would prefer not to have to use them, anyway. 

Outside of housing, there are some clues that activity has cooled from a re-opening bounce. Two local measures of manufacturing activity show this, as reports from the Federal Reserve Banks of New York and Philadelphia both downshifted in August. The FRBNY’s local gauge dropped 13.5 points, falling from 17.2 in July to just 3.7 in August – positive, but just barely so. A measure of new orders turned negative, posting a -1.7 mark, but the employment metric in the report edged higher, adding 2 points to climb to 2.4 for the month. Still, that was a value good enough to be the best since February, so that’s something. Just next door in the Philly Fed’s district, things cooled a bit, but not to the degree seen in New York. This local barometer slid by 6.9 points, sliding to 17.2 and although still solid has faded over the last couple of months. Orders eased a bit, falling 4 points to 19, and employment stepped down from a big gain last month, declining 11 points to 9 for August. There are more such reports due yet to come this month, but the early read is that activity is softening. 

Softening, too is the trend in the index of Leading Economic Indicators. The Conference Board reported that their gauge rose by 1.4% in July, a value fair enough if rather below the 3.1% and 3% pace of the two prior months. This broadly suggests that economic activity in July cooled but remained on an upward path, but also suggests that there isn’t a whole lot of momentum to power us through the end of the summer and into the early fall. 

It’s hard to get a clean read on labor markets, what with all the extra-cash distortions. Two weeks ago, initial claims for unemployment benefits slipped below 1 million for the first time since the pandemic shutdown; however, it wasn’t clear whether this was related to the expiry of the “bonus” $600 benefit being added on top of the typical support amount. For some folks losing jobs it may not have been worth filing right away if the bonus wasn’t being paid, or that it might have been a stronger incentive to seek out another job at full scale rather than accept the reduced benefit. In the latest week, August 15, initial claims popped higher by 135,000 to 1.106 million, as an executive order was signed by President Trump to add an additional $300 bonus (possibly $400) to weekly unemployment checks. This may have prompted some folks to file, since even a $300 kicker might more than cover the loss of wages. We’ll see if there is any follow through to this in the weeks ahead.

Applications for mortgage credit continue to wax and wane, albeit at elevated levels. The latest week was a wane, as the Mortgage Bankers Association reported a 3.3% decline in new mortgage applications. Requests for purchase-money mortgages ticked 0.8% higher for the week while those for refinancing dropped by 5.3% as rates edged higher and a new GSE-imposed fee in refinancing provided a little deterrent to replacing an old loan with a new one. 

Housing has certainly done its best to try to lift the economy out of the COVID doldrums; resurgent homebuilding has wide-ranging beneficial effects, and even refinancing creates income and spending streams that serve to prop up growth. With still-considerable economic headwinds evident and the pent-up demand that has powered the market higher unlikely to last for long, future activity may not be able to keep up the pace of this summer, and a slower market (and economy) would result. For now, we still have plenty of pieces in place to keep the ball rolling for another month or two, but after that, new demand will need to form more normally, and that requires an economy firing on all cylinders, which is not a sure thing at this point. 

Still, that’s for tomorrow; meanwhile, we’ll enjoy the now. Mortgage rates have firmed up a little over the last couple of weeks, partly due to a realization of markets risks underscored by that new refi fee, and also likely as an ancillary effect of that fee being imposed so abruptly that it means lenders may have to cover some or all of that cost for loans in the works. Recouping those costs means passing them onto other customers, and that means increases in risk premiums and higher rates for everybody. Aside from that modest upward pressure, the underlying instruments that influence fixed-rate mortgages are rather flat of late, so we’ll probably only see a basis point or two move in the average conforming 30-year FRM as reported by Freddie Mac next Thursday morning.

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