Evidence of the economic consequences of Coronavirus began to roll in in earnest this week. The U.S. economy continues to experience unprecedented increases in joblessness and our first hard evidence on consumer spending, which has accounted for virtually all U.S. economic growth in recent years, provides some insights into the depth and scope of the impacts we can expect for the first and second quarters of 2020.
- Jobless Claims Still on the Uptrend: The U.S. saw another 6.6 million new claims for unemployment insurance last week. That brings the four-week total above 17 million, which is nearly half of all the 37 million unemployment claims filed during the 2008 financial crisis. This is certain to be the primary drive of negative impacts to consumer confidence, consumer spending, and business revenues over the near term. It is also the driver of many of the housing transactions that have fallen out of escrow over the same time period.
- First Look at Coronavirus Retail Sales Hints at Magnitude of Q2 Impacts: Advanced retail sales figures suggest a deep impact to real GDP growth for the second quarter and potentially the first quarter as well. Retail spending posted its second monthly decline, and on an annualized basis, they were down more than 50%—even after excluding the volatile categories of food and automobile sales. Given that shelter in place rules were not broadly in place until mid-March, this suggests that consumer spending will be a significant drag on economic growth over the short run.
- More Buyers and Sellers Pull Back from Housing Market: The percentage of REALTORS® who have had a buyer withdraw an offer on an active property increased to 44% last week—a slight increase from 43% the previous week. On the sell side, the percentage of REALTORS® who have had a seller remove their property from the MLS rose to more than half (54%), which was up 8 percentage points from the previous week and is consistent with the MLS data that shows a bigger impact to supply (listings) than demand (sales) and a general tightening of inventory.
- New Listings Slide Again After Brief Pause: Last week, the number of new listings entered on MLSs statewide resumed their decline after rising briefly during the first week of April. Overall, there were 22% fewer listings entered onto the MLS last week and the amount of new inventory being added each week is down by more than 50% from the amount of inventory being added each week at the beginning of March, meaning that the outlook for closed sales is expected to follow suit in coming months.
- Many Homeowners Seek Payment Delays: The number of mortgages in forbearance increased by nearly 1,400% last week as job losses and shelter in place caused homeowners to seek assistance. As unemployment has seen its sharpest uptick in recorded history, many are taking advantage of recent deals between the government and mortgage lenders. The overall percentage of mortgages in forbearance is still relatively low at just 3.74%, but that is a significant jump from the 0.25% at the beginning of March.
- Still Awaiting Additional Funding for Key Stimulus Programs: Political wrangling remains ongoing in the effort to add an additional $250 billion in funding for key parts of the CARES Act that President Trump signed into law several weeks ago in order to bolster the economy and mitigate negative impacts associated with COVID-19. This program has had some initial success, but more is needed in order to help businesses survive this rapid decline in their business prospects.
- Pending Home Sales Losses Decelerate: After declining by double-digit percentages in the preceding three weeks, the number of homes entering the escrow process declined by a slower 8.2% during the week ending April 12th. The number of pending home sales has fallen significantly since the onset of the Coronavirus, and the housing market is likely to remain slow as unemployment mounts. And, although it is too early to tell whether this is a bottom yet, this is still a positive sign that the pace of decline slowing.
- California Home Prices Holding Up Well So Far: Although both buyers and sellers have taken a step back from the housing market, home prices have shown minimal response to Coronavirus thus far. In fact, sales, which are still holding up relatively well due to deals closing that were entered pre-virus, are down less than the amount of new inventory coming online so the market has actually tightened from a supply standpoint. Furthermore, the percentage of active inventory that has reduced prices has not risen much in the past few weeks, though listing prices on a per square foot basis have inched down slightly.
- Mortgage Applications Follow Similar Trend to Pending Sales: The number of new mortgage purchase applications has fallen sharply in recent weeks as job losses and more general economic uncertainty have caused homebuyers to put their plans on hold. However, in the latest weekly data from the Mortgage Banker’s Association, new purchase applications in California actually rose by more than 16% from the previous week. Again, it is still too early to call this a bottom, and the number of new mortgage applications remains roughly 50% below the levels from this time one year ago, but it is a positive sign to see the declines hit the pause button—even if only temporarily.
- Mortgage Rates Slightly Lower: Low rates on 10-year Treasuries have started to filter through to 3-year mortgage rates. Although spreads remain high, they have declined from nearly 300 basis points to roughly 250 basis points last week. On a daily basis, mortgage rates dipped to 3.25% for a day last week, which has a big impact on monthly mortgage payments in high-cost states like California.
The economy experienced another tough week of Coronavirus impacts with several indicators including retail spending, builder confidence, and unemployment claims highlighting the coming challenge for the broader economy during the second quarter. However, there were also glimmers of hope including slowing declines in pending sales, lower interest rates, and the fact that home prices have yet to exhibit the same negative impacts we have seen on the number of transactions and new inventory coming online.