Zillow Market Pulse: April 15, 2020

April 15, 2020

Gauges of retail sales activity, homebuilder sentiment and industrial production all suffered historic monthly losses. Steadying mortgage rates pushed refinance applications back up, but offered little help to would-be homebuyers.

• Homebuilder sentiment plummets to lowest level in nearly eight years

  • A measure of homebuilder confidence published by the National Association of Home Builders fell from a reading of 72 in February to 30 in March.
  • The 42-point fall easily dwarfs the previous record one-month decline of 10 points (February 2014).

• Overall mortgage applications tick up, but purchase applications fall

  • For-purchase mortgage applications fell 1.8% from the week prior in the week ending April 10.
  • In some encouraging news, non-seasonally adjusted for-purchase applications rose week-week in New York, California and Washington.

• Key data offer evidence of broad economic slowdown

  • Retail sales fell 8.7% in March from February, with clothing sales falling more than 50%.
  • Industrial production in March dropped 5.4% from February, the biggest monthly decline since 1946.

So what?

Homebuilder confidence was riding high in late 2019 and early 2020. Low interest rates, easing geopolitical tensions and a competitive housing market pushed homebuilder sentiment in December to within one point of its all-time high. Builder confidence remained steady for the next three months, before falling off a cliff in April. The 42-point decline in the headline index was easily the largest one-month fall in the history of the survey, which dates back to 1985 – the index had only declined by double-digit points once before, by 10 points in February 2014. Builders were roughly equally dismayed by current sales conditions as they were about expected conditions six months from now: Both readings sat at 36 in April, down by 43 points and 39 points respectively. Any reading below 50 indicates that more builders view sales conditions as poor than good. The reading sets the stage for tomorrow's March home construction figures, which should shed more light on how the home construction industry – which was booming in recent months – has responded to the early effects of the coronavirus outbreak.

Although serious concerns remain in the mortgage industry, rates for conventional mortgages have stabilized somewhat over the last week. Rate movements are still generally volatile, but one-day movements are far calmer than they were two or three weeks ago —  suggesting that historic intervention by the Federal Reserve has meaningfully eased strains in the secondary mortgage market. In the week ending April 10th, rates fell to their lowest levels since the beginning of March, prompting a one-week swell of refinancing activity and an overall uptick in mortgage applications. But the overall benefits of smoother rates to would-be homebuyers were less immediate, with applications for purchase mortgages dropping for the fifth week in a row. The weekly report did offer some subtle hints of positivity. The seasonally-adjusted decline in for-purchase applications was just 1.8% — the smallest in a month – and for-purchase applications grew on a (non-seasonally adjusted) weekly basis in the three states highlighted in the report – New York, California and Washington. The latter saw a 16.4% weekly increase in the metric. While overall for-purchase applications are down 35% from the first week of March, the modest signs of recovery in some of the nation's hardest- and earliest-hit regions offers some hope to those banking on a housing market rebound in the near future.

Housing market-specific data offered little for those seeking good news, but was positively sunny compared to news on the broader economy. The 5.4% monthly drop in industrial production – a measure of factory, utility and mining/oil output – was the largest drop in the index since the immediate post-World War II period. Similarly, the overall 8.7% decline in retail sales was the biggest one-month decline since the Commerce Department began tracking the data in 1992. Sales at clothing stores led the declines, falling 50.5% for the month, while spending at restaurants/bars and on motor vehicles each fell by more than a quarter (26.5% and 25.6%, respectively). Consumer activity, of which retail sales are a large portion, accounts for about 2/3 of overall economic output in the U.S. Taken together, the two reports suggest that large portions of the economy have come to a crashing halt in the last few weeks and that similar, if not sharper declines are likely in April. Unlike many headline data series (monthly jobs report, consumer sentiment), both of these releases reflect the entire month of March, rather than just a snapshot. It might feel like years ago at this point, but the majority of mandatory shelter in place initiatives and mass shutdowns of large portions of the economy didn't occur until just a few weeks ago, in the middle of March. So, while the numbers from March surely sting, it's likely that April's figures are really going to hurt.

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