Zillow Market Pulse: May 11, 2020

May 11, 2020

Almost half of respondents to a recent Federal Reserve survey said they expect home prices to fall in the next year. About 4 million mortgages are now in forbearance. And after steady improvement recently, investor confidence is currently near pre-crisis levels.

• Americans largely expect home prices to remain stable

  • A minority (44%) of respondents to the Federal Reserve Bank of New York's Survey of Consumer Expectations said they expect home prices to fall in the next year.
  • In general, consumers said they expect home price growth to be 3.36% over the next three years.

• Almost 8% of mortgages are now in forbearance

  • According to the Mortgage Bankers Association, the number of loans entering forbearance continues to grow, but at a slower rate.
  • But the volume of calls inquiring about forbearance programs has increased, suggesting the rate might reaccelerate.

• Key measure of market volatility is nearing pre-COVID levels

  • The CBOE Volatility Index (VIX) closed at 27.98 on Friday, the lowest level since February 26. Lower levels indicate an expectation for less volatility.
  • In mid-March, the reading closed at 82.7, nearly five times its average level from the previous decade.

So what?

Most states are already in some phase of reopening their economies — either planning for it soon, or already beginning it — despite lingering public-health concerns around the still-spreading coronavirus. But questions about how, and whether, consumers are going to respond to a re-opened economy are beginning to surface. Thus far, early signals suggest that people remain extremely cautious, with traffic at newly re-opened businesses remaining well-below normal levels. Fielded a few weeks ago, the New York Fed's April Survey of Consumer Expectations offered an in-depth look at how consumers were feeling about a variety of topics before some of these reopening policies went into effect. For the first time in the survey's history (which dates back to 2013), respondents said they expect home prices to remain flat for the next year. In February, the typical expectation was for a 3.1% annual increase in prices, near the highest in the survey's history. The muted consumer response and lingering pessimism in the housing market and other sectors increases the likelihood that the economic recovery from this crisis is going to be much longer than first expected — not least because consumer spending accounts for about 70% of the nation's economic output.

The share of U.S. mortgages currently in forbearance is up to 7.91%, according to the Mortgage Bankers Association (MBA), or to roughly 4 million loans nationwide. But while the number of borrowers taking advantage of forbearance relief continues to rise, the rate at which the level is growing continues to slow, which on the surface is an encouraging sign. But: According to the MBA, the volume of calls inquiring about forbearance options has also risen, which may mean an increasing number of at-risk mortgage holders are growing uneasy and weighing their options. Forbearance programs have offered immense support to borrowers unable to make their monthly payments, but have also contributed to a tightening in the mortgage market, ultimately restricting the rate at which home transactions can bounce back once the crisis passes.

The initial chaos of the coronavirus outbreak on U.S. soil was marked by madness across financial markets. The market dropped by a third, and virtually every asset that's traded at a high frequency exhibited severe signs of stress in the five or so weeks from late-February to mid-March. This stress was perhaps best summarized in the CBOE Volatility Index (VIX) — a measure of volatility in the market and proxy for investor confidence. The VIX, which averaged a level of about 17 from 2010 to 2019, closed at 82.7 on March 16, higher than any level at which the metric closed during the global financial crisis. But since then, the VIX has steadily declined and as of Friday was slightly less than 28 – its lowest level since February 26. The decline suggests that investors' expectations for volatility in the markets continue to fade, in large part because of the Federal Reserve's demonstrated willingness to pull every lever it possibly can to prevent a macroeconomic crisis from spiraling into a financial meltdown. So while the broader economy remains in dire straits, the outlook in financial markets remains fairly upbeat and continues to stabilize.

 

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