Zillow Market Pulse: June 17, 2020

June 17, 2020

Home construction activity recovered a bit in May. Mortgage applications continued their remarkable run. And wealthier consumers may be driving the decline in overall spending.

• Home construction activity begins to slowly reawaken

  • May housing starts rose 4.3% from April, but were down 23.2% from last May.
  • Building permits increased 14.4% in May from April.

• For-purchase mortgage applications keep rising

  • Applications for purchase loans rose for the ninth straight week, to an 11-year high.
  • For-purchase applications are up 20% year-over-year.

• Harvard: Wealthier households have stopped spending, while lower-income households have resumed

  • Spending among lower-income consumers sits just 4% below January's levels. Spending by higher-income consumers is 17% below levels at the start of the year.
  • The report suggests that the wealthiest ¼ of consumers are responsible for 2/3 of the decline in overall spending through June 10.

 So what?

Just two months after the industry experienced an unprecedented decline, home construction activity has started to improve. Builder confidence rebounded sharply in June, buoyed by a surprising increase in April new home sales, record-low mortgage rates and a potentially enduring appetite among buyers for new, never-lived-in homes. Historically low levels of for-sale inventory are also likely playing a role, as builders appear poised to bring more homes to a market starving for them. But despite the improvement, today's numbers were somewhat underwhelming given the recent momentum the housing market has gathered. It's important to note that, even for relatively simple projects, home construction is a time-consuming process and shouldn't be expected to just bounce back overnight. And reopening shuttered construction sites is a different process entirely than starting from scratch at the permitting stage and working up from there. There remains a long way to go before home construction is fully back to pre-COVID levels - permits are down 20.6% from their January high point, another testament to just how strong the construction pipeline looked pre-pandemic. Still, even though it came in slightly below expectations, today's release offers still more evidence of slow, steady and positive momentum in the housing market, which remains a rare source of relative strength in the overall economy.

Applications for home purchase loans improved for the ninth week in a row, as low mortgage rates continue to fuel buyer demand. After falling in April to its lowest level since 2015, the Mortgage Bankers Association (MBA) index of for-purchase mortgage loan applications has risen by more than 75% and now sits at its highest level in 11 years. But as the recovery continues on the applications side of things, there are some enduring signs of stress among homeowners. According to the MBA, the share of home loans in forbearance ticked up again last week, to 8.55% (or about 4.3 million loans). And mortgage servicers reported a noticeable increase in the volume of calls seeking forbearance information in the first week of June. A recent survey by ApartmentList found that 19% of households did not pay their June housing payment in the first week of the month, and an additional 11% made only a partial payment — a combined share of 30% that is one percentage point lower than the share in May. In particular, renters missed payments – at least in part – at a very high rate (32%). Thus far, households have largely been able to make up the difference by the end of the month. By the end of May, a combined 11% of households had missed their payments, down from 31% at the beginning of the month. This pattern will probably hold in June, but with expanded unemployment benefits due to expire at the end of July and no plans as yet for additional financial support for households, these improvement rates will likely fade in the summer and the share of households missing payments could easily increase.

While spending levels are still firmly below pre-pandemic levels, the previously reported improvement in spending in May does suggest people are growing more confident in the economy and are opening their wallets at an increased rate. A report from Harvard found that some groups have resumed spending at a much faster rate than others. Spending by lower-income consumers has recovered strongly in the last two months, and now sits just 4% below levels in January. Spending by high income consumers, meanwhile, remains 17% below where it was at the start of the year. The report suggests that the wealthiest 25% of Americans are responsible for two-thirds of the decline in overall spending since January. By-and-large, the gap is the byproduct of wealthier households holding off on somewhat discretionary purchases like restaurant spending, travel and other "high-touch" services that remain closed or limited due to the pandemic. Financial incentives and other tools that the government would traditionally deploy to combat this trend won't do much to improve spending levels. It's clear that discretionary spending at these sorts businesses is unlikely to return in full until a vaccine or treatment is found, leading to high levels of sustained unemployment in these sectors.

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