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Update on Coronavirus Market Impacts

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June 10, 2020

 

The latest weekly data suggests that, although the worst is behind us, a v-shaped recovery does not appear to be in the cards for California. Virtually every indicator has made significant progress since mid-April, but the recent pace of growth has lost momentum. And even as the economy continues to reopen, many aspects of our daily and economic life face ongoing restrictions. On top of this major learning curve, the movement to eliminate racial and social injustice also creates uncertainty about immediate economic activity. Taken together, we see an economy and a housing market in California that has both come a long way and has a long way left to go.

U.S. economy officially in recession: The National Bureau of Economic Research (NBER) has a Business Cycle Dating Committee tasked with determining the official start and stop dates for economic recessions. At their recent meeting, the Committee announced what many have long suspected: that the U.S. economy officially entered recession in February 2020 as the onset of Coronavirus forced a marked deterioration in economic and labor market activity beginning in June.

Home sales take a second step backward: California home sales took another step back last week after posting only a modest gain the previous week due to the Memorial Day holiday. On average, California saw 521 home close per day last week—down from 538 the previous week. However, the pace of sales has been trending downward prior to tipping negative last week suggesting slower growth in coming weeks.

Pace on pending sales and new listings disappoints: the pace of growth for pending sales and new listings also suggests sluggish sales in the weeks ahead. Pending sales in California were up last week with an average of 943 homes entering escrow per day last week compared with 917 the week before. However, the weekly uptick has been below 3% in 3 out of the past 4 weeks. In addition, the number of new homes added to the MLS has been essentially flat for the past month, including last week when 915 homes were listed on the MLS per day (on average)—down slightly from before the holiday weekend.

Price pressure starting to increase steadily: 67% of California REALTORS® surveyed over the weekend said that buyers they interacted with last week were expecting low prices for homes. That marks a 4-point increase from the previous week when 63% of REALTORS® respondents had buyers that expected lower prices. Eleven percent of respondents said they had a buyer actively try to renegotiate the price of a home they were in escrow on, up from 10% last week. In addition, the percentage of active listings and closed sales that have been discounted on the MLS has been steadily rising in recent weeks.

More buyers backing out of transactions: REALTORS® surveyed over the weekend reported an uptick in buyers withdrawing offers on homes that they had been ready to purchase. Twelve percent of respondents reported having at least one buyer withdraw an offer last week compared with 10% the week before. However, this is likely due to challenges with financing or job loss rather than a lack of demand as our monthly California Housing Sentiment Index showed the percentage of consumers that thought it was a good time to buy a home increased to 32% last month—a high for the series since we began capturing it in September 2018.

Fewer sellers getting cold feet: Although the multiplier effects appear to be having a lagged effect on buyer demand and prices, sellers have become less pessimistic as the dust begins to settle on COVID-19. A smaller percentage of REALTORS® had sellers remove their homes from the MLS last week (22%) than they did the previous week (24%). In addition, our California Housing Sentiment Index for June 2020 showed that, although it remains depressed at 40% from pre-crisis levels of more than 60%, the percentage of California consumers that think it is a good time to sell a home recovered significantly from just 29% in May.

New unemployment claims fall and surprising uptick in jobs: The number of workers that filed for unemployment insurance last week dipped below 2 million for the first time since shelter in place (SIP) orders were issued back in min-March. In addition, the Bureau of Labor Statistics’ monthly jobs report for May 2020 showed that the economy began to add back many of the jobs lost during the SIP as roughly 2.5 nonfarm jobs were added back to payrolls last month.

Mortgage applications continue to improve: Although the Mortgage Bankers Association neglected to release California mortgage applications last week, the number of new purchase applications nationwide continued to improve for 7th time in the past 8th week. California began seeing its mortgage applications start to improve a week before the rest of the nation, so it is likely that new purchase applications improved here as well last week and that California purchase applications likely rose above 2019 levels for the first time since the crisis last week.

Showings rise above 2019 levels for first time: After making tremendous progress over the past 6 weeks, the index of home showings finally rose above 2019 levels for the first time and continued the uptrend. Together with increasing jobs, all-time low interest rates, and consistently improving mortgage applications, the demand for housing has been steadily clawing its way back from its nadir in mid-April and that continued last week.

Surge in mortgage forbearance losing momentum: Although they rose slightly last week to 8.5% of all mortgages in forbearance, the number of Americans asking for permission to skip their mortgage payments has decelerated significantly in recent weeks. In fact, after shooting up by nearly 1.1 million the week of April 20, the number of new mortgages entering forbearance have fallen for 7 consecutive weeks to just 34,000 last week.

Things continue to move in the right direction, but at the same time we are seeing mounting evidence that the pace of the recovery is starting to slow after an initial bounce back that lasted for several weeks. REALTORS® are mostly reporting consistent improvement in their business and we are seeing the signs of buyer demand continuing to grow, but the combination of ongoing restrictions, the impacts associated with roughly 42 million job losses, and the ongoing slowdown in new inventory coming onto the market will keep us moving forward only gradually.

 


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