Economic future vexes the Fed, while housing sees a shift
Uncertainty continues to be the mantra for the Federal Reserve. The minutes from the latest Federal Open Market Committee meeting show that bankruptcy, economic detriment to low-income households and the potential for a second wave of COVID-19 are weighing heavy on the minds of members.
“Participants commented that, in addition to weighing heavily on economic activity in the near term, the economic effects of the pandemic created an extraordinary amount of uncertainty and considerable risks to economic activity in the medium term,” the minutes reflected.
The minutes also noted that the members feel it’s just as likely to have a “more pessimistic” outlook for a rebound as it is to see a baseline for improvement. The summary noted, “In this scenario, a second wave of the coronavirus outbreak, with another round of strict restrictions on social interactions and business operations, was assumed to begin around year-end, inducing a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year.”
FOMC members also discussed precautions for banks as more bankruptcies are expected. The advice was to limit shareholder payouts through dividends and buybacks. Unemployment due to businesses shuttering was also a major concern for the Fed members because the pressure “would fall disproportionately on the most vulnerable and financially constrained households in the economy.”
The Fed’s concern was only confirmed this week with another round of initial unemployment claims in the millions. More than 2 million more Americans filed an initial claim of unemployment this week, bringing the total to more than 38 million during the COVID-19 pandemic. While we are seeing the weekly numbers decline in size, we are still seeing millions of Americans join the unemployment lines each week. Not only that, more Americans are continuing to claim unemployment.
States are slowly starting to reopen, but it’s not fast enough to get people back onto payrolls. Continuing claims for unemployment, meaning a person who has filed for two weeks or more in a row, went up by more than 2.5 million over the last week. That brings the total of continuing claims past 25 million for the week ending May 9. Moreover, the four-week moving average of continuing claims sits just above 22 million.
The jobless claims data pushed markets lower Thursday, with the Dow dropping a little more than 100 points to end trading. However, the markets were up 2.6% for the week due to positive sentiment as states continued to reopen economies and boost business earnings. Equity futures are down in early market trading after Beijing announced plans to impose national security law on Hong Kong. Treasury yields were trading at an intra-week low of .64% on the news.
April Housing Sales Slump, May Picking Up the Slack
The housing market took a huge hit in April. Existing home sales were down 17.8% month-over-month and 17.2% year-over-year, according to the latest data from the National Association of Realtors. That’s the slowest sales rate since September 2011.
Because Americans held off on buying, that means they also held off on moving, exacerbating the issue of inventory. According to the NAR, the supply of homes is at 1.47 million units, a 19.7% drop annually. That is the lowest inventory for April–ever. The domino effect made its way into home prices, too. Less supply means that as demand is increasing, especially at certain price points, homes are gaining value. The median price for a home in April was $286,800, an increase of 7.4% year-over-year, and a record high (not accounting for inflation).
Supply is also facing the issue of lack of construction. Housing starts were at a five-year low in April, according to the Commerce Department. On an annual basis, the data shows a drop of 29.7%. Meanwhile, permits for future construction dropped by 20.8% for the month of April.
However, as states reopen, buyers are getting back into the market. The Mortgage Bankers Association data shows that home purchases were down 1.5% compared to this week last year. Just a few weeks ago, that deficit was 35%, meaning buyers are coming back and fast. Week-over-week, mortgage applications are up 6% according to the MBA.
Joel Kan, the MBA’s Chief Economist, noted which loans are seeing the biggest bounceback. “Applications for home purchases continue to recover from April’s sizable drop and have now increased for five consecutive weeks,” said Kan. “Government purchase applications, which include FHA, VA, and USDA loans, are now 5 percent higher than a year ago, which is an encouraging turnaround after the weakness seen over the past two months.”
It helps that buyers are being enticed by historically low interest rates that are remaining stable. This week’s average for a 30-year fixed-rate mortgage was 3.24% according to Freddie Mac. This is the fourth consecutive week that the Freddie Mac average has stayed below 3.30%.
The enticing rates were mostly a tease for borrowers who found themselves in loan forbearance due to job loss because of COVID-19, or other circumstances. However, this week, Fannie Mae and Freddie Mac announced some reprieve for borrowers and lenders alike. The new guidance from the GSEs allows for borrowers to show just three consecutive payments after their forbearance period ends to be allowed to refinance or buy a new home. Before then, the requirement was up to one full year of payments before being allowed to modify a loan.
Part of the reason for the move was a recognition that, in the initial frenzy of forbearance, some borrowers may have accidentally been placed in forbearance when they did not need to be. Those borrowers were left with a mark on their credit reports that was difficult to remove, and also made it so they were not legally able to refinance.
More than four million borrowers are currently in forbearance, and that’s just the start. Mortgage delinquencies nearly doubled in April, moving from 3.39% to 6.45% for the month according to Black Knight. The research group says that’s the biggest jump in its records.
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 contract.