Zillow Market Pulse: June 16, 2020

June 16, 2020

Retail sales bounced back strongly in May, but remain well below pre-pandemic levels. The Federal Reserve tweaked their approach to corporate bond buying. And homebuilder confidence returned.

• A record rebound in retail sales in May

  • Retail sales rose 17.7% in May from April, the largest one-month increase on record.
  • Sales remain 7.9% below February's levels.

• The Federal Reserve announced new flavor of corporate bond buying program

  • The Fed will create an index of corporate bonds from a variety of companies and purchase it proactively.
  • The move is intended to ensure market function and maintain accommodative financial conditions.

• After two-month absence, confidence among homebuilders returns

  • The National Association of Home Builders (NAHB) Housing Market Index rose 21 points in June, to 58.
  • Any reading above 50 suggests more builders say conditions appear "good" than "bad."

 So what?

The strong growth in retail sales is a welcome sign for the economy and an indication that some of the demand for consumer goods has been restored — but as with most data these days, it's useful to look past the headline numbers. The reopening of large portions of the economy obviously helped push sales higher, but it's likely that much of this improvement and the overall fact that people are still in a position to spend at all is thanks to fiscal relief measures taken at the early onset of the coronavirus outbreak. But some of those measures – including enhanced unemployment benefits – are due to expire in the coming months, casting some doubt on whether this improved pace of sales can endure. Thus far there is no plan for additional assistance or an extension of existing federal support for households, even as evidence of its effectiveness mounts. And the record increase in retail sales follows two straight record decreases – retail sales retreated in April to a level not seen since 2014. May's improvement was notable, but retail sales are still about 8% below February's levels and down 7.7% on the year.

In testimony presented before the Senate Banking Committee today, Federal Reserve Chair Jerome Powell reemphasized his call for additional federal support for small businesses and households. Such support would "limit long-lasting damage to our economy," Powell said, which still faces significant risks despite recent signs of stabilization and improvement in some sectors. Yesterday, Powell also announced that the Fed would create and purchase a broad index of corporate debt associated with companies rated as "Investment Grade" before the pandemic began. The Fed was previously purchasing corporate debt of individual companies, and will continue to do so going forward, though at a lesser rate. The new policy will decrease the need for companies to directly seek aid from the Fed and positions the Fed to act more proactively instead of reactively. Some questioned the new initiative, stating that financial markets appear to be functioning just fine at the moment. But it appears this latest Fed move is less about creating conditions that ensure the market continues to function properly, and more about maintaining accommodative financial conditions that will foster the nascent recovery.

Two months after a key measure of sentiment collapsed at the fastest rate ever recorded, it appears that homebuilder confidence has returned. The National Association of Home Builders' Housing Market Index rose 21 points in June from May – a record monthly increase that more than doubles the next best monthly gain. Strong improvements were seen across all four of the nation's regions — confidence rose the most in the Northeast, and remains highest in the West. New home sales unexpectedly rose in April, suggesting that low interest rates have kept homebuyer demand afloat during the economic downturn, and that home shoppers might have developed an increased affinity for never-lived-in homes. Tomorrow's new construction figures will offer another indication of how builders are viewing the immediate outlook and whether it is indeed all-systems-go once again. Anecdotal evidence also points to continued recovery in the new homes business: Late yesterday, homebuilder Lennar said that orders jumped by 20% in the first two weeks of June.

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