Zillow Market Pulse: June 26, 2020

June 26, 2020

Consumers' outlooks are clouded by a renewed surge in coronavirus cases. Personal spending is up sharply, but there's not a lot to it. And after almost a month of slowdowns, participation in mortgage forbearance programs increased last week.

• Consumers: The bottom is probably here, but what comes next is uncertain

  • The final June reading of the University of Michigan Index of Consumer Sentiment rose 5.8 points from May.
  • Sentiment in the Northeast improved the most on the month, and was largely flat in the South.

• A record increase in consumer spending offers little substance

  • Personal consumption rose 8.2% in May from April, easily the highest one-month improvement ever recorded.
  • Incomes remain 3.8% above February's levels, thanks in large part to government support.

• Participation in mortgage forbearance programs reaccelerates

  • After three straight weeks of decreases, the number of loans in forbearance rose last week.
  • 8.8% of all loans are receiving assistance, according to Black Knight.

 So what?

The final reading of the University of Michigan index of consumer sentiment slipped slightly from its initial read two weeks ago, but generally offered the same conclusion as before: Consumers' outlook has improved since bottoming out in April, and people are reasonably confident that economic conditions will at least not get worse. But expectations for the coming months remain subdued. And it's clear that recent surges in new coronavirus cases, and mitigation measures taken to stop them, aren't helping to clear up consumers' cloudy outlook. The headline index of consumer sentiment barely increased on the month in the South (up a scant 0.5 points), where case volumes have recently begun to take off. A slightly better, but still modest improvement took place in the West, which is also seeing a notable uptick in cases in many areas. But in the Northeast, where the spread of the virus has (at least for now) largely been subdued, the headline index rose by 19.9 points, an all-time record one-month increase. Nationwide, consumer confidence in federal economic policies has fallen to the lowest level since at least January 2017. So, nearly four months into this crisis, consumers’ outlook has stabilized, but the longer-term vision remains hazy and is tied closely to the coronavirus.

For some, it may be tempting to point to the record increase in consumer spending as evidence of an improved consumer outlook. The 8.2% monthly increase in personal consumption was driven in large part by purchases of more-durable goods including cars and furniture. But in reality, the headline data mostly offer false hope. Consumer spending levels remain almost 12% below pre-COVID levels. Annual growth in the core personal consumption expenditure (PCE) index – the inflation metric preferred by the Federal Reserve – was only just above 1%, well below the Fed's 2% target. More concerning, the monthly improvement was almost entirely due to an influx of cash made possible by federal stimulus checks and expanded unemployment benefits – policies that have either already expired or are set to expire in the coming month. Personal income in May was about $700 billion higher than it was in February, but employment compensation was about $1 trillion lower over that same span – a discrepancy that speaks to the enormous impact direct federal assistance has had on keeping the economy in decent shape amid this historic downturn. It also suggests that these increased spending rates will not last if these relief measures go away as planned.

After three weeks of decreasing participation, the number of loans entering into forbearance rose last week, according to Black Knight. The additional 79,000 loans in forbearance erases about half of the decreases accumulated over the last three weeks and is the latest sign that many households are continuing to experience significant financial stress and uncertainty. In all, 8.8% of mortgages are receiving some form of relief – about 4.7 million loans, with a combined outstanding balance of more than $1 trillion. FHA and VA loans – mortgages that have slightly more forgiving qualification standards – saw the largest weekly increase in number of loans receiving relief. Combined, 12.5% of these loans are in forbearance, the largest such group.

Click here to read past editions of Zillow’s Market Pulse updates.

The post Zillow Market Pulse: June 26, 2020 appeared first on Zillow Research.

via Zillow Market Pulse: June 26, 2020