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Update on Coronavirus Market Impacts

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April 22, 2020

The economy and the markets have set several records in recent weeks as the negative impacts of COVID-19 begin to accumulate. Preliminary indications suggested that the consequence of mandatory shelter-in-place orders would be severe, and recent data is now providing confirmation. On a positive note, California’s current projections show that “going hard early” has helped us to flatten the curve in projections released this week, and both listings and pending sales have found some recent stability, but declines in the housing market are expected to accelerate in the coming weeks as closed sales catch up with depressed pending numbers.

  1. 22 Million Workers Have Filed for Unemployment: Initial claims for unemployment insurance totaled 5.2 million last week, which is down from 6.6 million the previous week. However, more than 22 million Americans have filed for unemployment during the past 4 weeks—more than filed for unemployment insurance during the entirety of 2008. In California alone, nearly 2.2 million people filed for unemployment insurance over the same period except that state data is still unavailable for the week of April 10th, so these figures actually understate the total.
  2. Record Decline for Retail Sales: On a monthly basis, total retail sales declined by 8.7%, which equates to more than 66% on an annualized pace. That was the single largest decline for consumer spending ever and show how significant the effects of statewide shelter-in-place rules are on local businesses. Losses were widespread with sales at auto dealers, sporting goods stores, bars and restaurants, furniture stores, and clothing retailers all experiencing annualized declines of nearly 100%.
  3. California Ends 10-Year Winning Streak for Jobs: After nearly 10 years of uninterrupted growth, California shed nearly 100,000 jobs from its nonfarm payrolls. That equates to a 6.6% decline on an annualized basis, but likely reflects only a modest portion of the decline given that shelter in place orders were not imposed until mid-month. In addition, given the recent increase in unemployment claims in the state, job losses are expected to accelerate when April is released next month.
  4. Losses Mount As COVID-19 Catches Up With Closed Sales: Overall, existing home sales in California fell by 11.5% from February. On an unadjusted basis, home sales actually rose from February to March in all of California’s major regions. However, March is usually the start of the spring homebuying season and the market typically enjoys an even larger uptick than what was observed in March 2020. This is why the seasonally adjusted data shows a double-digit decline. It is important to note that closed sales had some momentum heading into March 2020 due to homes that went into pending status in January and February. As such, April is expected to better reflect the full effects of COVID-19.
  5. More Than 3,000,000 Now in Forbearance on Mortgage Payments: Data from the Mortgage Bankers Association shows that nearly 6% of all first mortgages are currently in forbearance. Based upon their coverage rate, that suggests that more than 3 million (and potentially as many as 4.7 million) homeowners nationwide have asked for relief from making mortgage payments over the near term. Although this should help some homeowners navigate the crisis, it is also concerning. After the crisis these homeowners could be financially compromised, leading to an increase in defaults and foreclosures as they are forced to catch up.
  6. New Construction Negatively Impacted by COVID-19: New housing starts experienced their single-largest monthly drop in nearly 40 years as Americans sheltered in place amidst the outbreak. In addition, builder confidence dropped dramatically last week by the largest amount since we began tracking it. With many homeowners unable to make mortgage payments and indications suggesting equal or greater impact on the rental side, builders are obviously scrutinizing and changing many of their current and near-term plans as they adjust to this new reality.
  7. Congress Acts on Additional Stimulus for Small Businesses:  On April 21, the Senate passed an interim spending bill that will replenish emergency aid programs for small businesses. The new bill allocates an additional $310 billion for the Paycheck Protection Program (PPP), which provides forgivable loans to small businesses. This program ran out of funds last Thursday, less than two weeks after it began accepting applications. $60 billion of this allocation will be set aside for community banks, credit unions, and community development financial institutions, with the goal that it will reach smaller businesses. This new bill also sets aside an additional $60 billion for the Economic Injury Disaster Loan (EIDL) program, to provide $50 billion in loans and $10 billion in emergency grants to small businesses. This program also ran out of funds last Thursday. The bill now heads to the House of Representatives.
  8. Declines in Listings and Pending Sales Decelerate: Although it is too early to determine that the market is approaching bottom, daily data on pending home sales and new listings both show hopeful signs of finding some stability in recent weeks. The number of new listings being added to MLSs statewide has increased in two of the previous three weeks. Southern California and the Central Valley experienced their first increase in the number of new listings since we began tracking daily data in early March, while the Bay Area has seen two consecutive weeks of increases in new listings. And, although pending sales declined last week, the -1.5% pace marks a significant slowdown from the double-digit declines from the first half of March.
  9. Most Monetary Stimulus Sitting in Banks, So Minimal Near-Term Inflation Expected: With the recent injection of significant amounts of both fiscal and monetary stimulus to the economy, some concern has arisen over potential inflationary effects going forward. However, it is important to note that the bulk of the monetary stimulus is sitting in the banks in the form of excess reserves. These measures are really aimed at backstopping the financial/banking system and are not making it out to the street in terms of personal and business loans and liquidity that are a necessary prerequisite for rampant inflation.
  10. Home Prices Show Only Modest COVID-19 Impacts Thus Far: Despite the declining number of home sales and the rising macroeconomic impacts, home prices in California have shown only modest effects of reduced demand. In part, this is because new listings declined more quickly and by larger percentages for home sales, so inventory levels remain tight. In addition, many home sellers view the current crisis as temporary shock rather than a full blown financial crisis and have, thus far, shown little appetite for reducing their asking prices with the percentage of active listings still hovering near their pre-COVID-19 level of 28%.

We are beginning to receive a broader picture of the negative impacts that the economy and the housing market can expect from COVID-19 as data for March and April 2020 starts to roll in. California joined the nation in breaking several records over the past week that suggest our challenges will continue, and likely accelerate, through the rest of April and into May. However, the market data also shows some signs of hope in terms of homes going onto the market and transactions that are entering the escrow process. It is still much too early to call a bottom for housing, but these positive signs provide some solace.

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