Zillow Market Pulse: October 9, 2020

October 9, 2020

Consumer housing sentiment improved in September, though buying optimism faded a bit. A sharp decline in mortgage forbearance program participation may signal improved market health. And still-declining credit card balances suggest consumers remain skittish.

Housing sentiment improved in September, even as buyer demand slipped

• 54% of respondents said they believe it's a good time to buy a home, down 5 percentage points from August.
• For the first time since March, a majority of respondents said it's a good time to sell a home.

Forbearance program participation declines sharply

• The number of active mortgage loans in forbearance fell by 649,000 in the week ending October 6.
• It was the largest one-week decline since the pandemic began.

Credit card balances unexpectedly fell in August

• According to the Federal Reserve's Consumer Credit Report, seasonally adjusted levels of consumer credit fell $7.2 billion in August from September.
• Revolving credit – largely composed of credit card debt – fell $9.4 billion on the month.

So what? 

A combination of low interest rates, record low levels of for-sale inventory and strong homebuyer demand has sent home prices soaring in the last few months. The Zillow Home Value Index rose 0.7% in August from July, the strongest monthly growth since 2013, and the pressure on prices hasn't relented. But while rising home prices are certainly better than the alternative, particularly during a recession, the persistent growth in prices appears to be finally weighing on homebuyer sentiment. A small majority (54%) of people said they believe now is a good time to buy a home, according to Fannie Mae, down from 59% a month ago and only slightly above its lowest post-pandemic level. Conversely, the share of people who believe it's a good time to sell a home improved 8 percentage points, to 56%. Improving home seller sentiment will be crucial in helping to address the extremely low number of homes for sale – there were 37.5% fewer homes on the market in the week ending October 3 compared to the same week a year ago. Even so, the share of people saying they believe it's a good time to sell is about 10 points below typical pre-pandemic levels, and 41% of respondents said they believe home values will continue to rise in the next 12 months, up from a low of 23% in April. Existing homeowners have less incentive to sell if they believe the value of their house will continue to appreciate.

Participation in mortgage forbearance programs accelerated in April. Now, six months later, many of those plans are expiring and not being extended. According to Black Knight, assistance to about a fifth of all loans receiving aid (or 649,000 of 3.6 million) ended last week. The one-week decline was easily the largest since the pandemic began, and there are now fewer than 3 million plans in forbearance for the first time since April. While the economic recovery remains tremendously uncertain, when viewed in a vacuum, a strong reduction in home loans requiring assistance is a good sign for the broader economy and the health of the housing market. Maintaining this strong rate of improvement in the next month – when 800,000 more loans are due to reach the end of their six-month term – will go far in lessening lingering fears of a foreclosure wave once relief completely expires.

Wednesday's August Consumer Credit Report from the Federal Reserve showed that consumer credit – measured as levels of non-real estate personal debt taken on to buy goods and services – fell by $7.2 billion in August from July, roundly beating expectations for a $14 billion increase. Seasonally adjusted levels of revolving debt – credit that is not tied to a fixed payment plan, such as a credit card or line of credit – fell by $9.4 billion, following much more modest monthly declines of $251 million and $1.7 billion in July and June, respectively. It may seem counterintuitive to consider a decline in debt to be a bad thing, but the data offered more evidence that consumer spending continues to slow and that households are holding off on certain purchases. The absence of government support measures including enhanced unemployment benefits and other relief is also likely hindering consumer activity.

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