In so many ways, 2020 had an outperforming start to the year.
This was especially true of the U.S. housing market. From the second week of January to the first week of March –– when most of the activity occurs in the housing market –– purchase applications were up double digits every week.
That is, until last week when applications were down 11% compared to the same time last year. And so it begins.
An 11% decline year over year may not seem like much, especially considering what else is going on in the economic markets, but keep in mind that when the report on purchase applications data was released, jobless claims hadn’t spiked to near 3.3 million.
What a difference a week makes.
The last existing home sales report was at a 13-year high, 300,000 sales above my highest range forecast for 2020. The last report showed 8% year-over-year growth in home prices. Even the recent pending home sales report this week showed 2.4% growth month to month and 9.4% growth year over year.
But times have changed.
What to keep in mind when looking at Q1 reports:
For those keeping track, the exact date of the last good jobless claims report was March 12.
That is also the date the government issued stay-at-home protocols started in many communities, banning any event of more than 50 people. Prior to that, we saw a lot of cancelations of conventions and other large events, but the economy as a whole had not yet “hit the fan.”
On March 18, purchase applications were still positive year over year, but more and more states were going into stay-at-home mode. California issued statewide stay-at-home orders on March 20. From March 18 to March 25, we saw a nationwide decrease of 22% in the application data, from plus 11% to -11% compared to last year. (See graph below.)
Because some states –– like California –– didn’t issue stay-at-home orders until March 20, this last report only reflects some days of the “virus” effect.
The next existing home sales report will be for the month of March and, therefore, will not show the full impact of the virus because stay-at-home protocols were not in effect until mid-to-late March in many areas. By April, we should see data that reflects the full impact of the nationwide social lockdown.
I would not be surprised to see some weeks of purchase application data down 54% or more, compared to last year. As drastic as this sounds, it would be in line with the declines in other consumption data lines. Opentable, the restaurant reservation service, for example, has had some prints that were negative 100%, compared to last year.
For some context, the last time purchase applications were down during the most active months was in 2014.
Back then, higher interest rates drove applications down 20% on-trend compared to the previous year. The existing home sales ended the year at 4,940,000 homes sold vs. more than 5 million in 2013, so there was not a big loss in sales year over year.
Two major hurdles for the housing market
However, the issue now isn’t about higher mortgage rates, even though they’re higher from recent all-time lows. More than half the country is prohibited from going to open houses. A block on the initial step to homeownership could bring the whole process to a screeching halt for some.
Social constraints are shutting down the economy and leading us into a recession that started in March, but fortunately, this virus won’t be with us forever. Once we are allowed to socialize normally again, we will still have great demographics for the housing market along with low mortgage rates.
A second problem for the housing market, that is smaller in scope and less immediate but will outlast the release from social distancing, is the decimation of the non-QM lending market. Many, if not most, of the non-QM lenders have gone out of business due to tightened credit.
Without these lenders, loans that allow for higher debt-to-income ratios, bank statement loans and niche loans for the jumbo market will be much harder to find. Even the FHA is tightening its lending standards for higher-risk clients.
I estimate that 4.5%-6.2% of loans that could have been done before March 9 now cannot be done. This percentage may increase as lenders raise their standards on the higher risk borrowers. Unlike mortgage rates that can change overnight, credit standards take much longer to adjust, so this tightening of credit may stay with us for some time.
Needless to say, many sectors of the economy, even outside of the housing market, have suffered parabolic drops due to the virtual shutdown of the country. The big, horrible news last week was that jobless claims spiked to near 3.3 million. The St. Louis Stress index, is a measure of financial stress in the markets and hadn’t gone above 1.25% since the great recession. It spiked to 5.79 on March 20. (See below)
Even when communities are released from stay-at-home orders and are able to resume normal business, I suspect it will take an additional 30 days before we will see a noticeable rebound in the purchase application data.
Here’s the good news
Last weekend, real estate was added to the list of essential industries in California. Now real estate transactions are allowed to resume, but it remains to be seen if folks will feel comfortable buying homes during a national shutdown of the economy.
Be on the lookout for more positive announcements regarding what will be allowed during the lockdown to facilitate real estate transactions, such as easing of social distancing rules.
Plus, the biggest demographic patch ever in U.S. history of ages 26-32, is about to emerge for first time home buying. Before the virus hit, we had over 160,000,000 people working. The new disaster relief package of $2 trillion will help bridge the economic gap. The government is spending a lot of money to keep people employed and paid while our country and the entire world fight this crisis.
Even with the $6 trillion of disaster relief, fiscal and monetary combined, we won’t return to our normal economic activity and growth until we are released from stay-at-home protocols.
This too shall pass. I expect the U.S. to return to the same slow and steady growth it has had since 2009. The pre-coronavirus economy in the U.S. was the longest economic and job expansion ever recorded in history. It took a global virus pandemic with government shutdown protocols to create this recession.
Now we have a lot of work to do to destroy this virus. But make no mistake, the American people have the strength, power, work ethic and conviction to defeat this.
