Zillow Market Pulse: June 29, 2020

June 29, 2020

Pending home sales came roaring back in May. Consumers are saving at a historically high rate, potentially posing problems for the economic recovery. And wage cuts are more common in this recession than in recessions past.

• A record increase in pending home sales

  • The NAR Pending Home Sales Index rose 44.3% in May from April, the largest one-month rise ever recorded.
  • The index is down just 5.1% from a year ago.

• Consumers continue to save at a historic rate

  • The personal savings rate fell 9 percentage points in May from April, but remains at 23.2%.
  • Prior to the pandemic, the official rate was higher than 10% only once since 1995.

• Wage cuts are far more common than a decade ago

  • 11.4% of workers experienced a wage cut in March, April and May, according to the Brookings Institute.
  • During the Great Recession, just 6% of workers had their wages cut.

 So what?

It was only a matter of time before home sales metrics started to improve. Higher-frequency reads of housing market activity and homebuyer demand show marked signs of progress over the last two months, but because of how it is measured the official reading on existing home sales had yet to catch up. That changed today with the release of May's pending sales index – a gauge of signed contracts on sales of existing homes, and usually a leading indicator of home sales in the next one to two months – and the news was even better than expected. The 44.3% monthly increase was easily the largest-ever one-month jump for the series. Pending sales in May were just 5.1% below last year's levels, meaning that despite a precipitous decline in the early Spring – in which the reading fell by more than 20% in successive months to as low as 34% below last year's levels – this forward-looking indicator on the housing market is within striking distance of where it was this time last year. Improvement in sales of existing homes in both June and July from earlier in the spring should be similarly stellar when they are released in coming weeks.

Friday's release of May consumer spending and income data was highlighted by the bounce back in spending and, more specifically, how much of it was thanks to government financial support. But another feature of the report requires attention – the savings rate among U.S. consumers remains historically high. The savings rate – defined as the share of disposable income that consumers do not spend – fell by 9 percentage points in May from April. But the rate remains historically high – prior to the pandemic, the national savings rate had never exceeded 17.3% and only once since 1995 has it even exceeded 10%. The increased rate of savings suggests that while tons of money is being pumped into the system, many people – particularly those with higher incomes and more stable job prospects – are holding off on spending, opting instead to sit on their cash. A failure to fully resume spending will likely impact those in lower-income occupations like leisure and hospitality and retail. If households decide that they would prefer to save their money for an even rainier day, due to the ongoing risks health and economic risks associated with the pandemic, revenue at retail stores, restaurants, theaters and other similar businesses of will continue to fall well short of pre-COVID levels, leaving those businesses unable or unwilling to hire back workers.

The losses in employment that the pandemic has caused have been well documented. But a related issue hasn't received as many headlines despite possibly having a similar impact on people's financial stability. According to a study from the Brookings Institute, cuts to base employee wages have been far more frequent during this recession thus far than they were previous recessions, including the Great Recession. The study shows that 11.4% of all workers received nominal wage cuts in March, April and May, nearly twice the share during the Great Recession (6%). Additionally, during the Great Recession, a small majority of all workers actually received wage increases, whereas so far during this recession, raises have been very rare. Of course, this current recession is only a few months old, so these trends might converge as this recession continues to evolve. But the report is yet another piece of evidence that the impacts to household balance sheets this time around have been very severe.

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