Can we still have a “normal” year in housing?
The impact of the coronavirus on the U.S. economy has created the worst waterfall and parabolic economic charts of our lifetime.
Unemployment claims have reached 33.5 million in less than two months of social shut-downs. April’s job losses alone were 20.5 million, and the unemployment rate is standing at 14.7%. (See chart below)
If you have been following me, you know that I have been closely watching the purchase applications and existing home sales data for indications of how the imploding economy is affecting the housing market.
No one was surprised that purchase applications have been negative year over year every week since the stay-at-home orders shut down the economy. The recent existing home sales report – which showed an 8.5% decline month to month but still positive on a year over year basis by 0.8% – didn’t even encompass a full month of sales during the shutdown. (See chart below)
The soon-to-be-released existing home sales report covering the month of April will show an entire month of coronavirus impact data and is expected to show even deeper declines.
With these horrible statistics, it is intuitive to think that 2020 is shaping up to be a terrible year for the U.S. housing market. But if we unpack this data a bit more, does this supposition stand?
In my last article for Housingwire, I mentioned that although purchase applications continued to be negative year over year since stay-at-home orders, the year-over-year declines were growing smaller. This was to my surprise, as I was looking for 54% declines year over year. The peak decline so far has been 35% year over year. The past two weeks have shown a noticeable increase of 12% and 6% in week-to-week data.
How is it still possible to show gains on a week-to-week basis with 33.5 million Americans filing for jobless claims?
To understand this, it is essential to remember that demographics and mortgage rates primarily move housing data. Twice in the previous expansion – in 2013/2014 and 2018/2019, when the 10-year yield climbed above 2.62%, demand softened and bond yields came back down – rates came back down and demand got stronger.
Today, mortgage rates are at all-time lows for employed consumers with proper credit. In terms of demographics, the most significant demographic group in the U.S. is comprised of ages 26-32. The median age for the first time home buyer is 33. Added to this, we have millions of Americans between the ages of 34 and 65 who are homeowners and may be ready to move up or down. So yes, indeed, we have both low-interest rates and promising demographics… in spades.
This data still begs the question: Are those of home-buying age financially capable of taking on mortgages in these turbulent economic times?
Let’s dig into this. The baseline mortgage demand in the previous few years was roughly 4 million mortgage buyers per year for the existing home sales market. Cash buyers have been making up approximately 16%-20% of the total existing-home sales recently in this market, even with increasing home prices. If the COVID-19 crisis produces better deals in the market, we can expect even more cash buyers. Others may shy away from the market due to financial losses or uncertainty.
For the sake of argument, let’s assume that the percentage of cash buyers nets out the same. That means we will need about 4 million new mortgage buyers this year to stay within the previously established trend of 4,600,000 – 5,770,000 existing home sales during the last few years of the previous expansion. Of course, breaking under 4.6 million short term is in play, but how long we stay under that level is the real question.
Despite the horrific recent job losses, we still have 125 million Americans working and/or getting paid. Clearly, not all of these workers are prospective home buyers. Some are already homeowners. Of the 20.5 million jobs lost in the recent jobs report, 62% of those belong to low-wage workers. These are not our prospective home buyers. About 38% of the job losses from the last report are mid to high-income jobs; this will undoubtedly affect demand.
Still, we can assume the majority of the job losses have not occurred among prospective home buyers.
As a result of the housing crash in 2005, sales went from 7,260,000 to roughly a tad under 4 million toward the end of 2008. If we saw the same type of decrease in sales from the cycle high of February 2020 of 5,770,000, then we would expect sales to be as low as 1,970,000 for the same length of time. But declines in purchase applications data on a year-over-year basis have been getting a smaller the last three weeks. We went from 35% declines year-over-year declines to 19% declines. And this is all happening during the continued stay-at-home orders.
With mortgage rates at record lows, 125 million people working and purchase applications showing signs of bottoming out, the prospect of a return to a semi-normal housing market when people are walking the earth is not complexly farfetched. But when will people feel safe walking the earth? By July 15, we should have a lot more clarity on what to expect going forward.
This is why June’s existing-home sales report is critical when it comes out toward the end of July.
I have stressed a lot recently to take March, April and May data with a grain of salt due to the violent swings in the economic data and stay-at-home protocols. We still have a lot of unknowns that can dramatically affect the data. When will jobless claims stop rising? When will stay-at-home orders be rescinded? What is the final unemployment rate? How many mid- to higher-income jobs will be lost?
One thing we do know is that sales and listings are falling. In the previous expansion, sales hit cycle highs when inventory was at cycle lows, which was February of 2020. When a lot of buyers are in the market, they eat up the inventory. In the post-COVID-19 market, supply will rise as those homeowners who were going to put their homes on the market in 2020 but took their listings off will come back eventually. Time will tell if the demand side will be up when the supply returns.
No matter what, I am still looking for five things to happen before we can expect a housing recovery.
With all this talk about economic data, it is essential to remember that the most significant risk to the U.S. is still this health crisis. Fix the health crisis, and everything else will follow.
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