Zillow Market Pulse: June 15, 2020

June 15, 2020

State budgets may take a 20% hit to their tax revenue. Mortgage lenders remain hopeful, largely because of a refinancing boom driven by low rates. And manufacturing activity in New York shows signs of life, but remains well below pre-pandemic levels.

• MIT: Coronavirus will drive state tax revenues down by 20%, on average

  •  New York, Maine and Hawaii will see the largest declines.
  • More than 1.5 million state and local government jobs have been lost since March.

• Mortgage lenders expect demand to persist

  • According to Fannie Mae, lenders expect refi demand to rise and purchase mortgage demand to fall over the next three months.
  • A majority of lenders said they expect to tighten lending standards further in the next quarter.

• Manufacturing activity in New York state improves in June

  • The Empire State Manufacturing Index rose 48 points in June from May, to -0.2.
  •  The improvement was driven by more factories opening in June, rather than marked upticks in activity.

 So what?

The cost and economic impacts of the COVID-19 pandemic have put state and local governments in an extremely difficult position. A new report from MIT estimates that the average state is likely to lose 20% in state tax revenues in 2020, with some states, led by New York, Maine and Hawaii, projected to lose up to 40%. Already, state budget shortfalls are already resulting in severe job losses – more than 1.5 million state and local public-sector jobs have been lost since March. But some estimates suggest that the losses could only just be starting, as increased spending demands on public health systems will further complicate the budget shortfalls caused by tax delays and decreased spending and incomes among state residents. A similar (though less acute) situation developed during the Great Recession, and studies suggest that the failure to direct aid to state and local governments prolonged the economic recovery. Solving the dilemma won't be easy: Unlike the federal government, states don't have the ability to implement monetary policy measures in order to help ease the financial burden. Calls have increased for more federal support to be directed at local governments, but thus far no legislation has been signed.

A majority of mortgage lenders said they believe their profit margins will increase in the next three months, according to last week's Fannie Mae Mortgage Lender Sentiment Survey — despite high levels of economic uncertainty, continued hardship in the labor market and tight financial conditions. But while most lenders remain bullish on their future prospects, the outlook for purchase mortgages and refinances varies significantly. A majority (almost 60%) of lenders said that record-low mortgage rates will allow for refinance demand to increase in the coming months. But lenders are far less optimistic about demand for for-purchase loans in the coming months, particularly those not eligible for support from Fannie Mae and Freddie Mac (and government forbearance support). More lenders said they believe that demand for non-conforming and government-issued loans will decrease in the next three months than those that said it will increase. Lending standards have tightened noticeably in recent months, and appear unlikely to ease in the near future.

The June Empire State Manufacturing Survey – a measure of manufacturing business activity in New York state – exceeded expectations and jumped 48 points from May, by far the largest such increase in the series' history. But it's important to be mindful of what the index actually measures. The Empire Index – like all of the regional manufacturing indices – shows the direction of change in activity for the sector, rather than the actual level of activity. So, while the Empire Index improved strongly in the month of June, it merely suggests that most manufacturers believe that conditions were better in June than they were in May – likely because a number of factories re-opened this month. While any improvements are welcome, the fact remains that the manufacturing sector is likely merely steadying rather than improving, and has a long way to go before achieving any semblance of normality.

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