Zillow Market Pulse: July 1, 2020

July 1, 2020

Purchase mortgage applications fell for the second straight week. Construction spending took a step back, but it could've been worse. And more relief for small businesses is making its way through the government approval process.

• Purchase mortgage applications down again

  • The second straight weekly decline follows a stretch of 10 straight weekly improvements.
  • For-purchase applications remain 15% above last year's levels.

• Residential construction spending fell compared to April

  • Private residential construction spending fell 4% from April, but remains 0.7% above last May's levels.
  • Year-to-date, spending on private residences is 8.8% above the same period last year.

• A deadline extension for applications for small businesses relief heads to the White House

  • The Senate and House approved an extension of the Paycheck Protection Program, allowing small businesses until August 8 to apply for forgivable loans from the federal government. The application deadline was set to expire yesterday.
  • The bill is now awaiting the president's signature to become law.

 So what?

After a two-month hot streak, purchase mortgage applications took a step back for the second consecutive week. Mortgage applications remain 15% above last year's levels, a testament to the solid rebound in application activity and strength of homebuyer demand amid the pandemic. And this seasonally-adjusted measure of purchase applications remains above levels at the end of January, so it appears that homebuyer demand remains sturdy even with these two weekly declines. But the two straight weekly retreats might also suggest that demand that had built up as much of the country closed its doors earlier in the spring may be beginning to fade just a bit. Record-low levels of for-sale inventory may also be constraining buyer activity more than in recent months, as home shoppers continue to have fewer options to choose from when entering the market. Tight inventory and relatively high demand should help to keep home prices afloat, but will likely constrain the recovery sales volume itself going forward. In the coming weeks, it will be important to see if this demand can persist as coronavirus case volumes continue to rise across much of the country.

The monthly decline in construction spending was unexpected, but the retreat in both overall spending and spending on private residential projects wasn't nearly as severe as the sharp declines recorded in other hard-hit sectors in recent months. The monthly downtick in overall construction spending was inflated by an upward revision to last month's figures, and total overall spending through May is still well above (5.7%) last year's total to this point. A large portion of construction projects were deemed essential in the wake of the coronavirus outbreak, helping to keep losses in the industry to a minimum. But some headwinds are forming for the industry. Reductions to state and local governments' budgets will limit government spending on construction. And spending on private residential construction will depend greatly on sustained homebuilder confidence. Builder sentiment rose strongly in June, and new home sales figures have shown marked improvements in the last couple months. Assuming that keeps up, construction spending on privately-owned homes should continue to improve.

Late last night, only four hours before the expiration of the program, the U.S. Senate unexpectedly passed a bill that extended the application deadline for the Paycheck Protection Program (PPP) – a federal loan program that makes aid available for small businesses — to August 8. Today, the House approved the Senate's extension, leaving only the president to sign it into law. The unanimous decision was welcomed by many who have called for more government support, and sets the stage for a broader conversation about a potential new round of economic stimulus. Despite recent improvements in consumer spending, small businesses overall remain in very tenuous positions. More than 40% of small businesses say they don't believe business won't return to normal for at least six months, and 42% reported a decrease in revenue in the week ending June 20, according to the U.S. Census's Small Business Pulse Survey. The extension of the PPP will at least offer these businesses a lifeline through the summer and/or until a new relief package is created.

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