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Update on Coronavirus Market Impacts

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July 1, 2020

The housing market continues to recover with pent-up demand surging at the national level and mortgage applications rising as buyers capitalize on record low rates. While the outlook for the real estate industry is looking more positive than before, the negative impact of the coronavirus pandemic on the economy will linger on for a while. There are encouraging signs that the economic downturn has reached the bottom. Even so, the resurgence in coronavirus infections in recent weeks suggest that the pandemic is far from over.     

U.S. pending home sales surged: The U.S. housing market mounted a record comeback in contract signing in May after two consecutive months of sales declines. NAR reported that the Pending Home Sales Index surged 44.3 percent in May, registering the biggest month-to-month increase since NAR started reporting the series in January 2001. On a year-over-year basis, the index dropped 5.1 percent. The index in the West region soared 56.2 percent from April but was down 2.5 percent from last May.  

Showings remain well above 2019 levels. Since surpassing last year’s level in early June, the index of home showings has never looked back and remained well above 2019 level for the last three weeks. As of June 30, 2020, showing activity was 56.2 percent above the same time of last year, according to ShowingTime. Record low interest rates, coupled with pent-up demand built up due to the lock down, fueled the surge in showings since housing demand bottomed out in mid-April.

Weekly mortgage applications ticked down but still higher than a year ago. Purchase applications declined on a week-to-week basis for the second week in a row after nine consecutive weeks of solid gain, according to Mortgage Bankers Association (MBA). Despite the weekly slowdown, the index continued to improve from a year ago and it has had a double-digit year-over-year gain for five consecutive weeks since the last week of May. The slowdown in purchase activity likely reflects tight supply, which may also have contributed to the average purchase application loan size increasing to a record high in the MBA survey.  

NAR revised forecast upward. With rates hitting record lows and pent-up demand bouncing back stronger than expected, the market outlook has improved. The latest NAR forecast has sales of existing homes off 7.7 in 2020, more optimistic than 10.7 percent projected in late May. The national median price is expected to increase 3.6 percent from 2019, compared to a 3.8 percent increase projected a month ago. Both sales and price are expected to improve in 2021, with existing home sales up 8.5 percent from 2020 and the median price up 2.5 percent year-over-year.   

Consumer spending rebounded. Consumer spending rose 8.2 percent in May from a month earlier, double the prior all-time high since record-keeping began in 1959. It remained below pre-pandemic levels, with a decline of 12 percent from February. The monthly gain was driven by massive fiscal stimulus injected in April. Whether Americans will continue to spend at May’s pace is unclear, as recent surges in virus infections could curtail consumer spending in coming months.

Personal income fell. While spending increased, household incomes dipped on a month-over-month basis by 4.2 percent in May but were still up 3.8 percent compared with February. The boost in personal income in April and May will likely be a one-off as assistance programs expire, unless more stimulus is approved by Congress. For now, household finances are holding up as Americans are still saving a big chunk of their money. The personal savings rate stood at a historically high 23.2 percent in May, down from 32.2 percent in April but up from February’s 8.4 percent.

Consumer confidence jumped more than expected. The loosening of the stay-at-home order restrictions and the relative improvement in jobless claims may have given hope to consumers and help improve their assessment of the economic recovery. Consumer confidence increased in June to 98.1 from 85.9 in May, well above the consensus estimate of 91.5. It is too soon to tell, however, whether this upward momentum is sustainable as the recent flare-up in coronavirus cases could reverse the trend. 

Coronavirus resurgence threatens to derail the recovery. With the number of COVID-19 hospitalizations increasing significantly in the U.S. in the last two weeks, many states are reversing their reopening. COVID-19 hospital patients in California have jumped more than 50 percent since mid-June, while the positivity rate has increased from 4.5 percent to 5.6 percent in the last 14 days.  Governor Newsom has already ordered bars in seven counties to close and hinted on more restrictions to come ahead of the July 4 holiday.    

Market pulled back in the latest week. Closed sales, pending sales and new listings in California all declined from the prior week. Is the pullback a blip or the beginning of a slowdown? It is too soon to tell what the real reason is behind the pullback. It could be a leveling off as the market got through the pent-up demand built up during the shutdown. It could be a slowdown in activity as market participants became concerned about the recent coronavirus resurgence. It could be an indication that the homebuying season is coming to an end and the market is transitioning into the off-season. The pullback could also be due to a lack of supply, as the level of new listings hit the lowest in the past four weeks. Only time will tell.

Prices leveling off. Home prices continue to improve on a week-to-week basis with a decelerating growth pace. The statewide median price per square foot for homes sold in the week ending June 26 remained on the rise but inched up only 0.5 percent from the previous week, a relatively small increase compared to an average gain of 2.7 percent in the past three weeks. Also, one-fifth (22%) of the REALTORS® who participated in a C.A.R. survey reported that sellers reduced their price to attract buyers in the latest week, the highest level since late May. The result is consistent with the latest weekly data collected from multiple listing services, which shows a bigger share of listings with price reduction when compared to the week before. 

Market activities appear to be leveling off as both supply and demand slowed in our latest weekly readings. Buyers are back in force as record low mortgage rates and pent-up demand drive interest. However, the lack of new listings – supply from both existing housing stock and new constructions - continues to be an obstacle to the recovery process and the latest coronavirus resurgence will add more uncertainty to the overall big picture. Nevertheless, sales and price are expected to improve in June from April and May. While the market is still far from being normal, the recovery has begun, and market conditions will continue to improve for the rest of the year.

 

 

 


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