Zillow Market Pulse: May 26, 2020

May 26, 2020

Sales of newly built homes were unexpectedly strong in April. Consumer confidence appears to be steadying as more parts of the country begin reopening. And most major economic sectors are still shrinking, but some are contracting more slowly than before.

• A surprising increase in April new home sales

  • Sales of new homes rose 0.6% in April from March, crushing expectations for a ~23% monthly decline.
  • The median sales price of a new home sold in April was $309,000, down 5.2% from March.

• Consumer confidence improved in April

  • The Conference Board's consumer confidence index increased to 86.6 in May, up 0.9 points from April.
  • Expectations for the next six months remain steady and have risen each of the past two months.

• Major sectors still declining, but not as quickly

  • The Dallas Fed's Texas Manufacturing Outlook Survey improved from April, but still indicates contraction.
  • The Chicago Fed's National Activity index fell to -16.74 in April, its lowest level on record.

 So what?

The coronavirus pandemic has generated any number of nasty surprises over the past few months, but the unexpected strength in April new home sales may be the first pleasant surprise yet - and the clearest indicator so far that housing, so unlike the last time around, will be a source of relative strength during this downturn. New home sales are often a more current measure of activity than existing home sales, and it seems clear that after some initial wobbliness, the market has certainly stabilized. Applications for mortgages have grown strongly over the last month as buyers look to capitalize on record-low interest rates, and builder confidence is showing early signs of coming back from the brink. A 5% monthly drop in new home prices points to builders eager to make deals and deliver for the critical middle segment of the market. The pandemic is almost certain to alter consumer preferences going forward, and a new appreciation for cleanliness and safety might sway more buyers to seek newly constructed, never-lived-in homes in the near future. Even so, construction projects themselves can be slow, and construction activity has slowed recently and will take some time to fully ramp back up - so inventory will remain tight for the foreseeable future. There is still a ways to go before we're completely out of the woods, but today's report is a huge step in the right direction.

Continuing the trend of surprising improvements, a recent bump in a key reading of consumer confidence in May suggests the plunge in sentiment has leveled off and that consumers are optimistic, at least on average, that the economic recovery has begun. Increasingly, it appears that after a period of extreme uncertainty, people are coming to terms with the fact that economic conditions are going to be difficult in the near future, while remaining hopeful of their prospects in the medium- and long-terms. While the index's read on consumers' confidence in present economic conditions fell just slightly, the forward-looking Expectations Index rose for the second straight month and now sits at a higher level than it did in October. There were some interesting differences among age groups: Confidence levels of households headed by someone aged 34 or younger continued to decline in May, while older households (35+) saw sentiment improve. The report also suggested that 5% of households plan to buy a home in the next 6 months, down from 5.3% in April but above November's reading of 4.7%.

Despite encouraging signals in the housing market and modestly hopeful indicators on consumers' outlook, there remains a shortage of hard economic data pointing to a wider recovery. The April national activity index from the Federal Reserve Bank of Chicago – a broad-based measure of national economic performance based on 85 different metrics – plummeted from March to April to its lowest level since at least 1967. But some early signals are starting to emerge that suggest some sectors might be starting to cautiously emerge from cover in May. Released last week, the IHS Markit readings on activity in both the manufacturing and services industries suggest that both of those sectors are still in a significant contraction, but activity is declining at a slower rate. That trend was echoed today by the Dallas Fed's Texas Manufacturing Outlook Survey, which showed continued, but less-severe declines in all of its key indices. The news is by no means "good," but any signs of a bottom or even a near-bottom will be welcome as the economy begins to test the water on a recovery.

 

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