Zillow Market Pulse: April 1, 2020

April 1, 2020

Purchase mortgage applications declined by double-digits over the past week. February construction spending is more evidence of what might have been. And a key manufacturing index fell only slightly, but hinted at more declines to come.

• Purchase mortgages and refinances are heading in two very different directions

  • The MBA Mortgage Purchase Index fell 11% from last week and 24% year-over-year.
  • The Refinance Index increased 26% in the last week on the heels of a sharp decline in mortgage rates.

• February construction spending proves — again — that the pre-crisis housing market was strong

  • Spending on private, single-family home construction rose 3.9% in February from January, and 16.1% from February 2019.
  •  Lumber prices have fallen recently, an early signal of a slowdown in builder activity.

• Key manufacturing index is mostly flat, but bigger declines could be coming

  • The ISM manufacturing index fell 1 point in March from February, to 49.1, beating expectations for a sharper decline.
  • But the New Orders index fell 7.6 points over the same timeframe, the lowest reading in 11 years.

So what?

Application rates of for-purchase mortgages and mortgage refinances headed in two different directions this week, which should come as a surprise to no one. Mortgage rates have swung wildly in recent weeks, driven by temporary surges in demand, underlying financial market volatility, Federal Reserve intervention and structural issues in the mortgage market itself. Rates fell in the week ending March 27th – the period associated with today's release – which prompted a jump in refinance volume after two straight weekly declines. But purchases were hobbled by a dreary economic outlook and limitations presented by mandatory stay-at-home initiatives that are obviously keeping many buyers and sellers on the sidelines. No matter how you slice it, the retreat in overall applications (down 15.3% from a week before) is another step backward for the mortgage market. With millions of monthly payments coming due for the first time since the COVID-19 crisis unfolded, lenders and servicers are bracing for a wave of borrowers asking for relief on their monthly payments. This will result in a loss of revenue that many lenders and servicers don't have the capacity to withstand, particularly if this continues for several months.

Today's February construction spending report offered more evidence of the home construction industry's growing optimism and strength in the pre-crisis world. Spending on private residences increased by 11.3% from last February's levels, the most of any private construction category. Single-family construction led the way, growing 3.9% from January alone, and 16.1% year-over-year. Construction is considered an essential service in many areas, so some projects are still ongoing, but it's still likely that this acceleration in residential spending from February will abruptly reverse once March data is published — and some data suggest this is already happening. Lumber prices have plummeted recently, suggesting that builders are starting to price in the notion that the spring selling season – one that was otherwise shaping up to be the best in years – is now likely a lost cause.

A pullback in the ISM manufacturing index was to be expected after all five regional manufacturing indices offered evidence of a decline. But the March dip in the index was surprisingly muted, likely due to a sharp increase in delivery times. In usual circumstances, this signals increased activity and stronger demand. But in the current climate, it more likely indicates supply shortages related to the pandemic. And some sub-elements of the index point to more declines to come: The new factory order index fell 7.6 points to 42.2, while the employment index fell 3.1 points to 43.8. Global indicators also offered evidence of a worsening outlook. It's important to note that manufacturing represents a much smaller portion of the economy this time around than it has in previous downturns. Friday's release of the ISM non-manufacturing index will offer more evidence of how the much-larger services sector has fared so far.

 

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