Friday Wrap: Economy Gaining Momentum; Economy Reopens; Purchases Continue to Rise

GDP tanked in first quarter, economy gaining momentum

The United States economy suffered greatly in the first quarter of this year. The gross domestic product shrank by a 5% annual rate, according to the Commerce Department. That is the biggest decline since 2008 when we saw an 8.4% drop in Q4 of that year. However, economists indicate the worst data is yet to come, predicting a 40% drop for Q2.

On the flipside, there is positive sentiment moving forward, with some analysts predicting a 20% or more rise in GDP for Q3. Although not enough to make up for what’s expected in Q2, it is still a sign of potential forward progress should all things remain on pace for recovery.

Unemployment numbers are also offering, albeit a very slight, positive sentiment as more people are headed back to work. The latest weekly data from the Labor Department shows another 2+ million people filing initial unemployment claims this week. That brings the total to nearly 41 million since the beginning of the pandemic.

The somewhat bright spot is the number of continuing claims, meaning people who have applied for two weeks in a row or more, shrank by more than four million. Continuing claims still sit around 21 million people, but seeing the number decrease as states reopen is a positive sign for the economy.

One issue that has popped up recently is that many U.S. workers simply don’t want to go back to work. In its periodic summary of the national economy (Beige book), the Federal Reserve noted that business leaders “cited challenges in bringing employees back to work, including workers’ health concerns, limited access to childcare, and generous unemployment insurance benefits.” The benefits include an extra $600 per week from the government in addition to regular unemployment checks.

The report was overall fairly negative in its outlook, stating “Although many contacts expressed hope that overall activity would pick-up as businesses reopened, the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery.”

 

Wall Street Finds Life as Economy Reopens

The Dow Jones Industrial average closed above 25,000 points this week. That’s the first close above 25,000 since March. The Dow surpassed the mark on Wednesday this week, propelled by the slow, yet steady, reopening of the American economy.

The latest unemployment claims numbers have analysts believing that we are past the worst part and are now on the upswing. Treasury yields moved higher in response to the unemployment numbers, with the 10-year Treasury inching up to 0.70% Thursday in early afternoon trading. However, a late Thursday afternoon announcement from President Trump that he would hold a press conference regarding China stifled that rally. The Dow dipped by 150 points with the S&P 500 and Nasdaq down 0.2% and 0.5%, respectively. Equity futures were flat going into Friday morning with the 10-year Treasury trading at 0.664%.

Meanwhile, the bond market has been ablaze in 2020, hitting $1 trillion worth of investment-grade corporate-debt sales in the first five months of the year. In their rabid hunt for liquidity, companies like Verizon and Exxon Mobil Corp. sold a combined $12 billion worth of bonds in one day. The Federal Reserve’s promise to buy up $750 billion worth of combined debt was enough to push those companies, and subsequently many others, into the market full force.

This week, hotel chain Marriott International Inc., sold the bond deal that tipped the scales to more than $1 trillion.

The problem will come if those companies are unable to use the cash to rebound after the pandemic has receded. That is the risk the Federal Reserve is taking in order to prop these companies up. It will be a balancing act for the Fed moving forward as it attempts to ween the companies off of the borrowing lifeline.

 

Home Purchases Shake Off April, Continue Upward Swing

Home purchases continue their resurgence with another week of positive mortgage application data. The Mortgage Bankers Association reports that purchase applications were up another 9% week-over-week. That’s the sixth straight week we’ve seen purchases increase. Zillow’s April 2020 market report shows that newly pending sales were up close to 50% nationwide for the week ending May 10. However, the month of April was a doozy overall.

The National Association of Realtors’ latest report shows pending home sales were down 21.8% month-over-month. Compared to April 2019, pending home sales were down 33.8%. The NAR’s chief economist, Laurence Yun, says that despite this negative data for April, he’s raising his forecast for the rest of the year. Previously Yun predicted a 15% drop in home sales, but has revised it to be an 11% drop with a 4% increase in home prices.

Helping the cause are extremely low interest rates. The 30-year fixed-rate mortgage average dipped again this week, according to Freddie Mac. It is now at 3.15%, which is the lowest level in Freddie Mac’s history dating back to 1971 and the third time the record has been broken in the last few months. Freddie Mac’s research shows that, “refinance activity remains elevated and low mortgage rates have been accompanied by a $70,000 decline in the average loan size of refinance borrowers this year. This means a broader base of borrowers are taking advantage of the record low rate environment, which will benefit the economy.”

There was also an increase in newly-listed homes which were up a little more than 12%. However, compared to a year ago, new listings are down 27.6%. That inventory issue continues to be a headwind for purchases.

COVID-19 halted a lot of construction of new homes. Plus, a flurry of refinances meant more people were staying put and not selling. That lack of inventory has kept home prices high. But don’t sleep on sales for newly-built homes. U.S. Census numbers show newly-built homes saw sales increase by 1% in April compared to March, against the expected 22% tumble.

Despite the pause in some construction, newly-built homes actually have a much heftier inventory than existing homes. According to the National Association of Realtors, at the end of April there was about a 4.2 month supply of existing homes, compared to a 6.3 month supply of newly-built homes.

“The April data for new home sales show the potential for housing to lead any recovery for the overall economy,” said Dean Mon, chairman of the National Association of Homebuilders. “Because the housing industry entered this downturn underbuilt, there exists considerable pent-up housing demand on the sidelines. The experience of the virus mitigation has emphasized the importance of home for most Americans.”

And the homes Americans are looking for are increasingly falling outside of major cities. A recent Harris poll shows that many buyers are looking to move away from urban areas in the wake of the COVID-19 pandemic. The poll concluded that “39% of urban dwellers said the COVID-19 crisis has prompted them to consider leaving for a less crowded place, according to the survey of 2,050 U.S. adults from April 25-27.”

A little more than 8% of home loans are now in forbearance, according to the MBA. That’s about 4.2 million home loans. Of that pool of loans, more than 11% are backed by Ginnie Mae. That group includes FHA, VA and USDA loans. Meanwhile, forbearance loans belonging to Fannie Mae and Freddie Mac increased to 6.4% of that total pool. It’s important to note that only about 0.25% of loans were in forbearance prior to COVID-19.

 

 

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

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 contract.