Zillow Market Pulse: June 3, 2020

June 3, 2020

Purchase mortgage applications improved for the seventh straight week. A report on private sector payrolls easily beat expectations, setting the stage for Friday's official jobs report. But the employment portion of a key read on the service sector dampened an otherwise encouraging report.

• The V-shaped recovery in for-purchase mortgage applications continues

  • According to the Mortgage Bankers Association, for-purchase mortgage applications rose for the seventh straight week, and now sit 18% above last year's levels.
  • Falling refinance volumes highlight overall tightness in the mortgage market.

• Surprising "strength" in the labor market comes with some strings attached

  • "Only" 2.67 million private sector jobs were lost in May, according to ADP, far fewer than expected.
  • Methodological differences might be deflating these losses.

• Some improvements are observed in the service sector, but with caveats

  • The ISM non-manufacturing (aka services) index rose 3.6 points in May from April to 45.4, above expectations but still at a level indicating contraction.
  • The employment index rose just 1.8 points, to 31.8.

 So what?

The recent string of good news regarding for-purchase mortgage applications just keeps getting better. In a remarkable, V-shaped improvement from lows reached in April, for-purchase mortgage applications are now up 18% from last year. This wholesale recovery is particularly noteworthy given the persistence of a number of factors that, on the surface, would normally act as roadblocks. Ongoing tightness in the mortgage market, shortage of for-sale inventory and, most of all, the devastating losses in the labor market have, thus far, not presented as much of a challenge to housing as many predicted. That said, the tightness in the market is having an impact on refinancing application volumes, which fell for the seventh straight week even as mortgage rates, on average, remained near their lowest levels on record. Earlier this year, refinancing accounted for 76% of all mortgage applications, now that share is just 60%.

The devastating downturn in the labor market has been well-documented and, by most metrics, is showing little-to-no signs of easing. But the market received a piece of good news today, ahead of tomorrow's latest update on unemployment claims and Friday's release of the May jobs report. Today's ADP employment report – which outlines changes in private sector payrolls – came in well-above expectations, showing a May decline in employment of "just" 2.76 million (compared to an estimated decline of about 9 million). But while the ADP report could be viewed as welcome news for the labor market, which is desperate for any positive indicators at this point, it should be taken with a grain of salt. While the ADP release and the more official report from the Bureau of Labor Statistics are strongly positively correlated, the magnitudes of the figures that they each state can vary substantially from month-to-month. What's more, there are notable differences in how each report tracks employees that have been furloughed or had their hours greatly diminished. ADP records all employees within a company as working, even if they have been placed on a furlough that may or may not be temporary. All told, today's better-than-expected report may be grounds for optimism, but we'll have to wait until Friday to truly find out. 

The ISM non-manufacturing index rose in May, but remains at a level which indicates contraction. While the news was the latest indication that large portions of the economy may be beginning to pare their losses, the report's subcomponents offered some conflicting signals on the state of the service sector. In addition to the headline figure exceeding expectations, the report also featured notable increases in overall business activity and new orders being placed by service-sector companies. However, the report's employment index barely rose from the month before, suggesting that sharp contractions in the employment level in the service sector (which accounts for about  80% of the U.S. economy) remain. What's more, much like last month, the headline figure was likely inflated by the measure of supplier deliveries – usually a measure of increased demand, but these days likely a measure of supply constraints due to the pandemic. Any improvements are welcome in today's economy, but the service sector still has a way to go before we can safely say it has begun to recover.

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