Wall Street Muted as Congress Debates
This week’s Federal Reserve Open Market Committee meeting ended with what everyone expected: Rates are staying put. Moreover, the Fed said it would continue its purchases of bonds as well as the current lending and liquidity programs put in place to help mitigate economic problems due to the pandemic.
The post-meeting statement was generally lukewarm with regard to economic growth in the first half of the year. “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year,” the post-meeting statement said. “Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”
In the meantime, there is a battle on Capitol Hill as Congress looks at two possibilities for another round of pandemic relief legislation. The HEROES Act was proposed in May by House Speaker Nancy Pelosi (D) while the HEALS Act was introduced Monday of this week by Senate Majority Leader Mitch McConnell (R).
The HEROES act would cost the U.S. about $3 trillion while the HEALS Act comes with a $1 trillion price tag. Both would extend unemployment supplements, just in differing amounts with the HEALS act reducing the $600 payment to $200 per week. Both acts include another round of $1,200 stimulus checks for Americans, but there are different ideas on who should receive those based on income.
As the bills are being worked out, housing remains in the crosshairs. While both of the bills in Congress would continue to give some sort of stipend to Americans in the form of a stimulus check or unemployment supplement, there is a lot of worry about the recently expired eviction moratorium. The ban on evictions was a temporary measure, and it expired last Friday, July 24. As of Friday July 31, the extra $600 per week unemployment supplement also expired. Without action by Congress, it’s very likely that the U.S. is about to find itself in the middle of an eviction crisis as millions of unemployed Americans can’t afford to pay their rent.
Research done by the Urban Institute shows that about 30% of the country’s rental units were covered by the eviction ban. Beyond the federal ban, there were also state eviction moratoriums that are also expiring. It’s estimated that 40 million Americans could be evicted if no further support is put in place. John Pollack is a coordinator of the National Coalition for a Civil Rights to counsel. He says that in 2016, for the full year, there were 2.3 million evictions. If nothing is done soon, Pollack says “we could see that many in August.”
Economic Collapse in Q2, Unemployment Rampant, Tech Soars
The latest data from the Labor Department shows another week of more than 1 million Americans filing initial unemployment claims with more than 1.4 million recorded this week. We are now at 19 straight weeks of more than 1 million Americans filing initial unemployment claims. Continuing claims rose for the week as well, settling at more than 17 million Americans filing unemployment claims for at least two straight weeks.
The Labor Department’s report came out on the same day the Commerce Department reported a record plunge in the country’s gross domestic product. Neither the Great Depression nor the Great Recession saw numbers similar to what was released on Thursday. In the second quarter of this year, the GDP contracted by a jaw-dropping 32.9%. The GDP contracted by a mere 8.4% in Q4 of 2008, in comparison. The previous worst on record was a 10% contraction in 1958.
Miserable data apparently also loves company, as this month we learned a key economic indicator for Morgan Stanley saw its largest one-month decline on record. The Morgan Stanley Business Conditions index measures a number of economic factors including hiring, hiring plans and capex plans among other data. June’s index dropped by 32 points down to a measly 13 points.
The news hit Wall Street hard as the Dow Jones initially plummeted more than 500 points Thursday morning before settling down and ending the day down 225.92 points. The 10-year Treasury note yield dipped to 0.54%, its lowest level in three months. In early Friday trading, futures were up following Thursday afternoon earnings from high-flying tech companies.
The high point on Wall Street this week was the tech industry as quarterly earnings reports continued to flow in. FAANG stocks like Facebook, Alphabet, Amazon and Apple all delivered better-than-expected earnings results, diametrically opposite of everything else in the economy. Apple saw an incredible double-digit revenue growth while the majority of the country was shut down. The company passed the $400 per share threshold in after-hours trading on Thursday. Meanwhile Amazon and Facebook traded 5.4% and 6.1% higher, respectively, with Facebook showing 11% growth. Those four stocks collectively added about $200 billion to their total market cap.
Despite that incredible rally, Wall Street remained somewhat muted Friday morning as the $600 unemployment stipend officially expired. That leaves millions of Americans, who lost their jobs due to shutdowns because of the pandemic, with very minimal funds available with rent and mortgages due August 1.
Housing Continues to Thrive
The low interest rate environment continued this week with Freddie Mac’s average on a 30-year fixed-rate mortgage coming in at 2.99%. According to Freddie Mac’s data, home purchase volume is 20% higher than it was a year ago. The chart below from Freddie Mac shows the trajectory of the average mortgage rates for 30-year, 15-year and 5/1 ARMs over the last year.
What’s helped spur the activity is a slower growth in home prices. The latest Case-Shiller home price index shows home prices went up by 4.5% in May, a slower pace than April. That pace was likely due to the initial shut downs so it’s probable we will see that home price index increase for the months of June and July. Phoenix, Seattle and Tampa continue to see the fastest home price acceleration at rates of 9%, 6.8% and 6%, respectively.
The National Association of Realtors’ chief economist, Lawrence Yun, forecasts the median price for a home will likely increase by 4.3% this year and hit $283,600. The median price on a new home, Yun predicts, will jump by 1.1% to $324,900.
The forecast from Yun was released in tandem with pending home sales data. June’s pending home sales saw a 17% increase, giving us back-to-back months of double-digit increases for that data point.
Contributed by Greg Richardson, MAXEX Managing Director
Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized