Zillow Market Pulse: June 2, 2020

June 2, 2020

Homebuilders appear more confident after a recent stretch of encouraging data. A surge in household savings led to a sharp uptick in bank deposits, but raises questions about the economic recovery. And new details are emerging on the unintended limitations of the ongoing federal crisis response.

• Homebuilder confidence buoyed by strong data

  • Taylor Morrison reported net sales of their homes rose 17% year-over-year in May.
  • Barclays Equity Research's gauge of traffic to for-sale newly built homes rose to 51 in the second half of May, up from 10 in early April.

• Sharp increase in savings prompted a surge in bank deposits

  • Deposits in U.S. banks rose by $1.8 trillion in the two months ending May 13, the biggest two-month increase on record.
  • The household savings rate jumped to 33% in April.

• Two reports outline shortfalls of federal response efforts

  • A report from Harvard suggests that publicly-traded companies, employing about 8 million people, are unable to qualify for direct relief from the federal government.
  • A separate report states that about one-third of unemployment benefits have yet to be paid out.

 So what?

Construction spending fell by less than expected in April, thanks in large part to modest monthly declines – and strong annual improvements – in spending on private residential construction projects. And the numbers are likely to improve in the coming months, as demand for new homes has held surprisingly firm and propelled April's new home sales figures to a monthly gain. The improved demand is likely to boost builder confidence which began to show a modest rebound in May following a precipitous drop in April. Official June figures won't be available for another couple weeks, but anecdotes have emerged in the last few days that suggest business remains steady for home construction firms. Taylor Morrison – the nation's sixth-largest homebuilder – reported that net sales of their homes rose 17% year-over-year in May, and that weekly traffic to their homes was three times higher in the last week of May than it was in early April. Separately, a report from Barclays Equity Research suggests that home traffic to for-sale new homes, and prices of those homes, were both up strongly in May from April.

Last week, we learned the consumer savings rate skyrocketed in April to 33%, far and away the highest level on record. This historic increase in savings drove a surge in bank deposits, leaving banks big and small with more cash than they had previously expected and limited options of where to invest it. Today, Wells Fargo announced that it is no longer issuing auto loans to independent dealerships, tapping the brakes on a large portion of their lending business. The increased savings rate also introduces some consumer questions. If the savings rate remains elevated, it implies that consumers remain uncertain about the future and cautious about how much money they spend, which will limit revenue for businesses, weaken the pace of recovery and likely result in more layoffs and a slower recovery in the labor market. At the same time, the savings rate could easily plummet in coming months as unemployment benefits wear off and people are forced to spend their savings just to stay afloat. The rate at which people's savings are recycled back into the economy will dictate the pace of the economic recovery. But of course, this rate is itself dictated by improvements in the labor market and sufficient government support, not to mention containment of the virus and business' ability to reopen. People will only spend if they are both confident in the economy's direction and are in an appropriate position to do so.

Lastly, two reports released today highlight infrastructure constraints and eligibility limitations that have significantly restricted the distribution of federal aid in response to the pandemic. A new analysis from a group of Harvard economists found that, despite their size, many highly indebted public companies that employ millions of people are unable to qualify for direct relief from the federal government, leaving their estimated 8 million employees at a severe risk of job loss. A Bloomberg report found that almost one-third of all unemployment benefits owed to Americans have not yet been paid, a shortfall estimated at $67 billion. The speed at which unemployment claims have grown has outpaced the rate at which dated payment systems can make payments to people seeking aid, according to the analysis. Slowing the pace of job losses will be paramount to ensuring allocated aid is fully paid to those in need. Thus far, the rate hasn't abated and experts are calling for about another 2 million more claims to be reported on Thursday.

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