Zillow Market Pulse: June 24, 2020

June 24, 2020

Despite a small step backward, for-purchase mortgage applications are firmly up from a year ago. In new virus hot spots, consumers' outlooks seem to be declining. And many small businesses remain on high alert, despite improving economic conditions.

• For-purchase mortgages step back a bit, but remain above last year's levels

  • The Mortgage Bankers Association index of for-purchase mortgage applications fell 3% from the week prior, but remains 18% above last year's levels.
  • Seasonal factors and low inventory likely contributed to the decline.

• Concern among households in new virus hotspots appears to be on the rise

  • Nationwide expectations for lost income and housing scarcity have fallen, according to the U.S. Census Bureau's Weekly Household Pulse Survey.
  •  But Arizona, Texas and Florida have seen increases in some of these metrics, likely due in part to rising coronavirus cases.

• Consumers' uncertainty is clouding the outlook for small businesses

  • A recent survey by the National Federation of Independent Business shows 14% of small businesses expect to layoff employees after exhausting loans received through the Paycheck Protection Program.
  • About 12% of these plan to reduce their staff by 10 or more people.

 So what?

The news won't do much to dampen an otherwise strong overall resurgence in the mortgage market, but for the first time in a month and a half, purchase mortgage applications fell from the week prior, likely due to two factors. First is the persistent, historic shortage of for-sale inventory. Despite improvements in newly-listed homes entering the market, the level of for-sale inventory remains more than 17% below last year's levels. The lack of available homes on the market will help keep home prices from falling precipitously, but will also constrain the recovery of home sales in the coming months. Same goes for housing demand, as people will be less likely to enter the market if they don't see enough homes that fit their criteria. Seasonality is the other key factor likely contributing to the slight retreat in home purchase loan applications: In normal years, mortgage applications tend to top out in May before slowing through the late spring and early summer. The closure of large portions of the market earlier in the year very likely forced some buyers planning on purchasing in the spring to wait until the summer, contributing to the remarkable performance of the mortgage market in recent weeks.

In general, recent signals of consumer behavior have been fairly steady. Consumer sentiment and retail sales – to name a few – remain well below their pre-pandemic levels, but recent data show that some of these indicators have stabilized and, in some cases, are showing signs of improvement. Retail sales rose 17.7% in May from April, the largest one-month increase on record. But in many parts of the country – including some of those that have seen a recent surge in coronavirus cases – some of these promising trends have begun to reverse. According to the U.S. Census Bureau's Household Pulse Survey, as of June 13, 35% of Arizona households said they expect their employment income to drop in the next four weeks — up from 27% in the week prior, and above the national average of 31%. In Florida, 34.3% of households said they either missed last month's housing payment or expect to miss their next one – far more than the national rate of 23.3%, and up from 27.9% a week ago. Similar trends are forming around food scarcity in Texas. The official release of consumer sentiment and spending comes on Friday, but for now it appears that concerns among households are beginning to heighten, particularly in parts of the country where the virus is running rampant.

Aside from the actual containment of the virus, uncertainty around consumer psychology is arguably the most important factor in the next phase of the economic recovery. News reports of renewed shutdowns have started to pop up in recent days, but a large-scale shutdown like we saw at the onset of the crisis appears unlikely at this point. So, the recovery will depend in large part on how confident consumers are in leaving their homes and spending at a relatively normal rate — especially at small businesses. At this point, measures of how/whether consumer patterns are changing in areas with renewed coronavirus outbreak are only anecdotal, but a recent report suggests that most small businesses remain on high alert. A recent study by the National Federation of Independent Business (NFIB) shows that while economic conditions for small businesses have improved of late, many are still planning on an additional round of layoffs and are pessimistic about their ability to survive without additional government support.

 

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