The impacts associated with COIVD-19 are still being tallied and negative reports continue to roll in regarding the depth and breadth of the negative consequences the economy will suffer. It is clear that the difficulties will continue for at least the next 1-2 months, even as California gradually begins to resume some economic activity in the coming weeks. However, there are also preliminary indications that we are beginning to get a clearer picture of what the bottom of this downturn could look like. Several key indicators have been showing some nascent stability over the past two to three weeks.
- Bigger than Expected Drop in Q1 GDP: The Bureau of Economic Analysis released its preliminary estimate of economic growth for the first quarter of 2020 and the economy shrank by 4.8% on an annualized basis. This was driven by a pullback in consumer spending, which drove the entire decline in growth. Residential investment and government spending both rose modestly, but not enough to cancel out the negatives of consumer and business spending. International trade also improved, but only because imports fell by more than exports—both were down. This is significant because only the second half of March was impacted by the pandemic and suggests that the second quarter will see a much steeper decline.
- 26.5 Million Workers Have Filed for Unemployment: The unemployment rolls expanded by another 4.4 million workers last week bringing the cumulative total to 26.5 million during the past 5 weeks. However, the number of new claims for unemployment insurance has fallen for 3 consecutive weeks. We are still seeing millions of workers file for unemployment each week, so there are still significant challenges ahead, but, encouragingly, the increases are getting smaller.
- Consumer Confidence Suffers Largest Drop in Nearly 50 Years: The Conference Boar’s measure of consumer confidence plunged by the most in a single month since 1973, dropping over 30 points. Currently, consumers more pessimistic than they have been since the financial crisis in 2009. Under the surface of the headline number, consumers opinions of current expectations drove the decline, reflecting shelter in place rules and recent unemployment numbers. At the same time, however, expectations for the future conditions have been far less impacted and actually inched up modestly in the April report. Still, confidence is still well below pre-crisis levels so we should not expect a resurgence in spending near term.
- Double Digit Decline in Closed Sales Continues: In the housing market, pending sales and new listings began to decline almost immediately following shelter in place rules while closed sales remained relatively stable through the 22nd of March. These sales had been negotiated in January/February well before the S.I.P. orders and continued to work their way through escrow. Daily tracking data from MLSs across the state shows that closed sales lag the decline in pendings by roughly 4 weeks. Sales dropped roughly 12% in the week ending April 24 compared to the previous week.
- 3.5+ Million Now Asked to Skip Mortgage Payments: Weekly data from the Mortgage Bankers Association indicates that 6.99% of all first mortgage loans have requested forbearance on their payments as unemployment rises and businesses suffer through shelter in place. Based upon CAR’s analysis of the number of mortgage loans, that equates to between 3.5 and 5 million homeowners who feel that they are (or could be) unable to make their monthly mortgage payment.
- Mortgage Applications Finding Bottom?: California has now seen the number of new mortgage applications rise for three consecutive weeks. After falling by more than 60% on a year to year basis, purchase applications in California increased by low single-digits the preceding two weeks and increased by 17% last week. That still places the number of new purchase applications roughly 30% behind where they were at the same point in 2019, but it does suggest that the decline has lost momentum following a significant initial pullback. So while closed sales will remain weak for the coming months, we also have a better sense of the overall magnitude of the housing decline in the state.
- Signs of Life in California Pending and Listing Data: Following last week’s performance, California’s housing market continues to see signs of life as new listings added to MLSs rose for a second consecutive week. The number of new listings increased in the Bay Area, Southern California, and the Central Valley and were flat from the previous week in the Central Coast. Pending sales also increased for their third consecutive week after falling precipitously almost immediately as the shelter in place went into effect. New listings and pending sales still remain depressed relative to pre-crisis levels and the recent uptick was very modest in natur. As a result, sales are expected to remain weak for some time and the recent trends arebeing interpreted as potential signs of a bottom rather than the beginning of a recovery.
- Showings Leveling Off After Big Initial Drop: Like mortgage applications, the number of private showings has started to increase modestly in recent weeks. Showings are still down by roughly 30% compared to the same time last year, but there were more showings last week compared to the week before. This provides further evidence that the initial impact of the shelter in place that drove significant declines of as much as 75% at the onset of the crisis has started to lose its head of steam.
- Per Square Foot Data Shows Relatively Stable Home Prices: Overall, home prices in California have remained relatively stable despite deep retrenchments in inventory and home sales related to COVID-19. Compared to the first week of March, prices on a per square foot basis last week were down by just 3.6% or less in the Bay Area, Southern California, and the Central Valley. Recent survey research shows that buyers are expecting significant discounts on pricing, but that sellers are more likely to remove their home from the market and discounting remains stuck at roughly pre-crisis levels.
- Financial Markets Hang on to Recent Gains: Despite a worse than expected GDP report, the financial markets have held on to its gains in recent weeks with the Dow Jones Industrial Average hovering in the 23,000-24,000 range for several weeks running. We are still in an environment where more than two years of gains have been wiped out, which is likely partially responsible for the recent pullback in spending and the rise in unemployment. These data also suggest that the market is beginning to better assess what the total cost of COVID-19 will be once the dust settles.
It is still far too early to declare ourselves on a recovery footing. Unemployment rolls have swelled by millions here in California, business revenue and consumer spending are down dramatically, and many homeowners and renters cannot keep up with their payments/rents. Pending sales and new listings remain down, which means that, even if we are able to gradually resume activity in the next 3-4 weeks and the recent uptick in pending sales continues, the outlook for closed sales remains depressed through June. Still, it is encouraging that we are starting to be able to assess the bottom with several key indicators stabilizing in recent weeks including new unemployment claims, mortgage applications, private showing, new listings, and pending sales. We are not out of the woods yet, but we may have a better sense of where the demarcation line is.