Zillow Market Pulse: July 20, 2020

July 20, 2020

Consumer optimism turned downward in July, erasing two months of improvements. Facing severe budgetary shortfalls, most U.S. cities have placed major spending projects on hold. And an early read on seriously-delinquent mortgages nearly doubled in June from May. 

Surging case volumes are dampening consumer optimism

• Announced on Friday, the July University of Michigan Index of Consumer Sentiment unexpectedly fell 4.9 points from June to land at 73.2.
• The forward-looking Expectations Index retreated to just above levels from May.

Most U.S. cities are cancelling/pausing large projects due to funding shortages

• Two-thirds of cities have reportedly delayed or nixed infrastructure and capital spending due to the coronavirus, according to the National League of Cities.
• A new Senate-proposed relief bill reportedly does not include any additional spending for state and local governments.

Earlier indicator of mortgage serious delinquency rates nearly doubles in one month

• According to the FHA's Early Warning System, 8.82% of all mortgage loans have missed at least three consecutive monthly payments.
• Participation in forbearance programs is likely driving most of the monthly growth.

So what? 

Beginning in May, consumers' confidence in the economy improved for two straight months as economic indicators improved, jobs began to return and states started to reopen. Data reported on Friday suggests that this rising optimism has stalled, a development that poses real challenges for the overall economy's recovery. The unexpected 4.9-point decline in the University of Michigan's Index of Consumer Sentiment nearly erased the improvements the index has enjoyed over the past two months and squashed any momentum that had been gathering. Perhaps most worrisome is the fact that the survey's Expectations Index – which measures consumers' outlook for the next six months – fell 6.1 points to 66.2, just above May's reading of the measure. The decline suggests that the recent surge in case volumes and uncertainty surrounding a new fiscal support package are meaningfully eroding mounting consumer confidence, as people view their household financial situations, labor prospects and overall ability to engage with the economy as far more uncertain than even just a few weeks ago. With key fiscal benefits due to expire in the coming days, the next few weeks will be crucial in dictating the path of consumer confidence going forward. It's also important to note that while confidence dropped by more in the two months ending in May than in any prior two month stretch, the headline index remains well above lows reached in the Great Recession as well as all-time lows touched in the early 1980s, suggesting that it has a ways to fall if the conditions continue to worsen.

Speaking of additional fiscal support, a report from the Washington Post today added more specifics to one potential bill that is being formulated. Among the report's key takeaways is the fact that the bill being proposed by the Senate and the White House does not include any additional aid for city and state governments, something that had been an area of focus by some policy makers for months. Reports shared in the last few months have shed light on the challenges state and local governments are facing as tax revenues have receded during the pandemic, and more evidence was offered up today. According to a survey conducted by the National League of Cities, an advocacy group, about two-thirds of cities across the country have reported that they have either delayed or outright canceled plans for infrastructure or capital spending projects as a result of the pandemic and its impact on their top line. In total, at least $9 billion in construction work on transportation projects have already been lost and the fates of some larger projects – such as a $51.5 billion plan for New York City to update its subway system – are hanging in the balance. Government programs are generally seen as a good way to stimulate an economy out of a recession, but that will be difficult to achieve this time around should funding continue to be as large an issue as it is now.

An early read on mortgage delinquencies, offered by the Federal Housing Administration, showed a sharp rise in June in the share of loans that are identified as seriously delinquent – that is, those that have missed at least three consecutive monthly payments. The timing of the pandemic alone would lead us to expect a rise in this metric. March was the beginning of mass closures of businesses across the country and the beginning of a historic wave of job losses, so seeing a sharp increase in June (three months later) isn't entirely surprising. What's more, it's likely that a large portion of these loans are participating in forbearance programs that allows them to delay monthly payments without penalty – a fact that probably inflates the true extent of the immediate hardship that some of these homeowners are facing. But such a sharp monthly increase (the share of loans in serious delinquency is more than double that in April) is the latest indication of how many households are already struggling at this moment and the devastation that could take place if/when key federal support disappears.

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