Zillow Market Pulse: June 9, 2020

June 9, 2020

Peak joblessness may be behind us, but things remain dire. The Federal Reserve expanded its small business lending facility. And while loan delinquencies rose in April, the financial well-being of those mortgages remains solid.

• The labor market is steadying but remains badly wounded

  • 7.7 million people were laid off in April, according to the Job Openings and Labor Turnover Statistics (JOLTS).
  • That's 3.8 million fewer people than March, but still almost three times worse than any month during the Great Recession.

• The Federal Reserve expands its ability to support small- and mid-sized businesses

  • The central bank announced plans to broaden available loan sizes and ease payback conditions for would-be borrowers.
  • They also eased restrictions for banks in order to incentivize lending.

• Mortgage delinquencies rose in April, but the general state of loans in forbearance remains solid

  • 80% of homeowners in forbearance have at least 20% equity in their home or more, according to Black Knight's April 2020 Mortgage Monitor.
  • Homes priced between $300,000 and $600,000 saw the largest percentage point increase in loan delinquency from March to April.

 So what?

Much like last weeks' surprisingly positive May jobs report, today's release of April JOLTS data showed that, despite signs that people have begun to slowly go back to work, there remains a severe lack of jobs in the U.S. economy. The 7.7 million layoffs in April were noticeably less than March's total of 11.5 million but were also nearly three times worse than any month's total during the Great Recession, and easily the second-highest monthly total ever. The number of people quitting their job (a sign of confidence in one's job prospects and general strength of the labor market) fell to 1.8 million, about half the normal rate before the coronavirus. The number of people hired plummeted to its lowest level on record, but the number of overall job openings fell only slightly and remains above levels seen in 2014, suggesting that companies seem to think that they will be able to hire again soon and are deciding to keep their job requisitions open. Worth noting: At just 44%, the response rate for April's report was 10 percentage points below what is deemed "typical," potentially calling the accuracy of the data into question.

Yesterday, the Federal Reserve announced an expansion of their still yet-to-be-launched Main Street Lending Program, which aims to offer loans to small- and medium-sized businesses. Among the main changes made to the plan was an increased amount of time for which companies will be able to defer principal payments on the loans, as well as an expansion of both the minimum and maximum loan amounts. The Fed also eased requirements for banks, who now will be required to hold a smaller percentage of the loans on their books, making it easier (but also riskier) for them to extend capital. Combined, the changes aim to address concerns both that companies would not be able or willing to partake in the program and that banks were appropriately equipped to extend loans. But the changes also mean the Fed will need to take on more risk, as they will now be acquiring loans made under riskier circumstances. The program was initially announced in March but has not yet been deployed. Fed Chair Jerome Powell recently suggested that the Fed is very close to being in position to launch the lending facility, and we will likely learn more details in the Chairman's scheduled press conference tomorrow following the June Federal Open Market Committee meeting.

Black Knight's April Mortgage Monitor offered more context surrounding the health of mortgages nationwide, and suggests that the bulk of loans currently receiving forbearance support are in a decent position to recover once the aid runs out. Most loans in forbearance have strong equity positions: About 80% of those loans have a current loan-to-value ratio of 80% or less, meaning the homeowner has at least 20% equity in their homes. This equity should give homeowners more flexibility to meet obligations and ultimately avoid foreclosure once forbearance relief expires. The report also showed that the largest percentage point increase in mortgage delinquencies (including loans in forbearance) came from loans associated with homes priced between $300,000 and $600,000. The rate at which loans are entering into forbearance has generally slowed in the last few weeks, but plenty of uncertainty remains and some are concerned that a second wave of forbearance entrants will begin later in the summer after expanded unemployment benefits expire at the end of July.

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