Week of May 18th, 2020 in Review
Professionals around the country continue to feel the lasting impact of the COVID-19 pandemic, as another 2.44 million people filed for unemployment during the week ending May 16. While the number of new claims has declined in recent weeks, the total amount remains staggering.
In housing news, the National Association of Home Builders released its Housing Market Index, which is a real-time read on builder confidence. While all components of the index (including present conditions, future expectations and prospective buyer traffic) improved from April to May, the figures are still understandably and significantly lower than they were in March.
Reports also showed that Housing Starts and Building Permits both plunged from March to April, as did sales of existing homes.
Fed chair Jerome Powell was in the news, appearing on 60 Minutes and testifying in front of the Senate. Of note, he said on 60 Minutes that the economy could shrink upwards of 30% in the second quarter. However, he does not see the economy entering another depression and he believes the US will get to “an even better place” than it was before the coronavirus hit, and that it “won’t take that long.”
Powell also testified that the Fed is “committed to using our full range of tools to support the economy in this challenging time even as we recognize that these actions are only a part of a broader public sector response.” He also said, not surprisingly, that rates will stay at zero “until we are confident that the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals.”
Lastly, there was some promising information at the start of the week from Moderna regarding its vaccine trials, as 45 participants produced COVID-19 antibodies. This is especially significant, given that 52% of small businesses in a recent survey said that they fear they would be out of business in 6 months or less if restrictions to reopen continue. Stocks responded favorably when the news was first reported and we will continue to monitor this story.
Unemployment Woes Continue
Another 2.44 million people filed for unemployment for the first time during the week ending May 16, which was in line with estimates. California (+246K), New York (+226K) and Florida (+224K) saw the largest gains.
Factoring in the number of new claims, continuing claims, and the amount of people in the labor force, we estimate that the unemployment rate is around 21.5%. However, when we estimate the number of new jobs the Paycheck Protection Program has temporarily created, we think that the unemployment rate could be closer to 24.7% without it.
April Existing Home Sales Plummet
The latest Existing Home Sales report, which measures closings in April and likely represents buyers shopping for homes in February and March, showed that sales decreased by 17.8% from March to April. This was the largest monthly drop since July 2010 when the home buyer tax credit, a federal stimulus resulting from the subprime mortgage crash, expired. Sales were also 17.2% lower when compared to April of last year.
The median home price was reported at $286,800, up 7.4% year over year. Single family sales were down 16.9% compared to March, but condos saw a much bigger drop of 26.4%. This could start to show the migration from cities into suburbs.
Inventory was much tighter and remains a concern, as there were only 1.47 million units for sale in April, down 1.3% from March and a whopping 19.7% lower than last April.
At the current pace of sales, this represents a 4.1-month supply and is the lowest April supply figure on record. This should be very supportive of prices, especially with demand remaining strong as evidenced by purchase application volume.
As NAR’s chief economist Lawrence Yun explained, “Record-low mortgage rates are likely to remain in place for the rest of the year, and will be the key factor driving housing demand as state economies steadily reopen. Still, more listings and increased home construction will be needed to tame price growth.”
And Speaking of Home Construction …
The National Association of Home Builders released its Housing Market Index, which is a real-time read on builder confidence, for the month of May. While the reading increased to 37 from 30 in April, it is just over half the 72 reading that was reported in March.
Diving deeper into the survey’s components, confidence in present conditions rose 6 points to 42 from April, versus 79 in March. Future expectations were up 10 points from April to 46, as compared with 75 in March, while prospective buyer traffic rose to 21 from 13 after reaching 56 in March. Keep in mind that 50 is the baseline, meaning anything above 50 signals expansion while below means contraction.
The NAHB said, “The fact that most states classified housing as an essential business during this crisis helped to keep many residential construction workers on the job, and this is reflected in our latest builder survey.” Also, “Low interest rates are helping to sustain demand.”
There is a caveat to all of this, though, namely, “High unemployment and supply side challenges including builder loan access and building material availability are near term limiting factors.”
Home construction figures were also released for April, with Housing Starts down 30% from March, the biggest percentage decline on record. Specifically, starts for single family homes dropped 25%. Building Permits, which are a sign of future construction, plunged 21% with single family permits down 24%.
While we can likely expect housing – the “economic driver” – to slow, the lack of supply as noted above will be supportive of home prices.
FHFA Update on Home Forbearance
The Federal Housing Finance Agency has announced that Fannie Mae and Freddie Mac borrowers in forbearance can apply for refinancing and new purchase mortgages once their loans are current. The policy waives a previous mandatory wait of 12 months, which will allow faster access to record-low rates.
According to the FHFA, borrowers are eligible to refi or purchase a new home if they are current on their mortgage in forbearance but continued to make mortgage payments or reinstated their mortgage. Borrowers are eligible to refinance or buy a new home three months after their forbearance ends and they have made three consecutive payments under their repayment plan, payment deferral option or loan modification.
“Homeowners who are in COVID-19 forbearance, but continue to make their mortgage payment, will not be penalized,” said FHFA Director Mark Calabria. “Today’s action allows homeowners to access record low mortgage rates and keeps the mortgage market functioning as efficiently as possible.”
Home Hack of the Week
With the start of summer less than a month away, spending time in your garden may be high on your to-do list. Here’s a great checklist you can follow from the folks at Better Homes & Gardens.
Bird feeders are no exception when it comes to needing a spring clean. If you haven’t done so already, wash and refill yours with fresh seeds for the season.
As your spring bulbs continue to flower, take note of any empty spots in which you may want to plant additional bulbs in the fall.
Annuals are great for providing pops of color throughout your yard as well as in containers on your front porch or back deck. Check local garden centers for the best options for your area and soil type. Fresh layers of mulch around your plants can also help minimize weeding over the summer.
Lastly, take a word of advice from moms and don’t forget your veggies. Tomatoes, peppers and herbs are great choices as the weather starts to warm in earnest.
What to Look for This Week
After the Monday market closures in honor of the Memorial Day holiday, the rest of the week is jam-packed with reports. Tuesday brings several key housing updates, including the Case-Shiller and FHFA home price indexes for March and New Home Sales for April, plus May Consumer Confidence.
The latest weekly Initial Jobless Claims will be critical to watch on Thursday, while April Durable Goods and the second estimate for 1Q GDP will provide important updates on the economy. Friday brings a wide range of news, including the final Consumer Sentiment numbers and manufacturing highlights via the Chicago PMI for May, and the Fed’s favorite measure of inflation, Personal Consumption Expenditures, along with Personal Income and Spending for April.
The Fed continues to purchase Mortgage Backed Securities in line with its goal of stabilizing the markets. After falling below support at the 50-day Moving Average at the start of the week, MBS were able to rally and now continue to trade in the middle of a 53bp range between the aforementioned support and overhead resistance at the 25-day Moving Average.
The 10-year is in a similar position, being squeezed in a range between its 25 and 50-day Moving Averages, though it has been moving lower and testing the 25-day. This is related to the negative stochastic crossover on the stochastic chart. If Treasury yields break beneath the 25-day, we may see Mortgage Bonds move higher and follow suit.
Week of May 11th, 2020 in Review
The pandemic continues to impact all areas of the economy, wreaking havoc especially in the labor sector as another 2.98 million people filed for unemployment for the first time during the week ending May 9.
Meanwhile, inflation was on the decline in April at both the consumer and wholesale levels, which was expected due to the lack of pricing pressure. Retail sales also dropped 16.4% from March to April, making it the worst report on record.
Not surprisingly, optimism among small businesses fell in April per the National Federation of Independent Business’ index. Plans to hire and capital spending both declined from March, while future and current compensation plans were slashed in half. The bright spot was that those who expect a better economy jumped from 5% to 29%.
Consumer Sentiment did also rise from April to May, coming in at 73.7 and above expectations, due in part to stimulus checks from the CARES act improving people’s finances, noted Richard Curtin, chief economist for the Surveys of Consumers.
Manufacturing in the New York area improved as well from April to May but is still very weak.
Of note in housing news, the Mortgage Bankers Association reported that as of May 3, 7.91% of mortgages are now in forbearance, up from 7.54% the prior week.
Lastly, Fed Chair Jerome Powell gave some somber remarks on Wednesday, saying that the path ahead is uncertain and significant risk remains to our recovery. He noted that 40% of households earning under $40,000 lost their jobs in March alone and said additional relief may be needed in the near term. Powell vowed that the Fed will use all its tools to aid in our recovery, though he did say that the Fed was not considering negative rates for its benchmark Fed Funds Rate, which the Fed cut to zero in March.
Initial Jobless Claims Remain in the Millions
Another nearly 3 million people filed for unemployment for the first time during the week ending May 9, with Connecticut (+299K), Georgia (+241K) and Florida (+222K) reporting the biggest increases. While the total number is a decrease from the 3.17 million claims filed during the previous week, the amount was about 500,000 claims higher than anticipated.
When we factor in the number of new claims, the number of continuing claims (which increased by about 460K to 22.8 million) and the amount of people in the labor force, we estimate that the unemployment rate is around 19.4%. And if we try to estimate how many new jobs the Paycheck Protection Program has temporarily created, we think that the unemployment rate could be closer to 22.6% without it.
The bottom line is that while initial jobless claims are slowing, they remain at unbelievably high levels, especially given that we were averaging 200K new weekly initial jobless claims prior to the pandemic.
Inflation Declines in April
As expected, inflation fell in April due to the lack of pricing pressure. April’s Consumer Price Index (CPI), which measures consumer inflation, came in at -0.8% while dropping from 1.5% to 0.3% on an annual basis. A big part of the decline was due to oil prices, which have dropped significantly. The monthly drop was the largest decline since the Great Recession in 2008 and marked the second straight monthly decrease.
The Core reading, which strips out volatile food and energy prices, dropped by 0.4% from March to April and from 2.1% to 1.4% when compared to April of last year.
On the wholesale level, the Producer Price Index (PPI) was down 1.3%, which was worse than the expected 0.5% decrease. PPI also moved lower from 0.7% to -1.2% year over year, which was worse than expectations. Core PPI, which strips out food and energy prices, also decreased by 0.3%, which again was worse than expectations, while the annual rate dropped from 1.4% to 0.6%.
Retail Sales and Manufacturing Update
Retail sales tumbled over 16% in April, worse than the 12% drop predicted and coming in as the worst report on record. While online retail sales rose 8.4%, everything else fell precipitously.
Clothing stores were hit especially hard, showing a -78.8% plunge in sales, while sales at electronics and appliance stores (-60.6%), furniture and home furnishing stores (-58.7%) and sporting goods stores (-38%) were also impacted in a big way. Bars and restaurants also saw a -29.5% drop in sales, as did gasoline stations (-28.8%), with people on the roads less.
The control group, which takes out autos, gasoline and building materials, showed that retail sales fell by 15.3% overall, three times the estimate. We will see how these figures change in the coming months as states begin to reopen.
The May Empire State Manufacturing Index, which measures manufacturing activity in the New York area, rose to -48.5 from -78.2. This was better than estimates of -60 but still very weak. Of note, the 6-month outlook did recover to 29.2 from 7.0 on the obvious hopes that the situation can’t get any worse as things reopen and factories can turn the lights back on.
Home Hack of the Week
Many people have been eating at home more than normal in recent months, and if that’s true for you, now is a great time to inspect your fridge to make sure it’s running efficiently. Here are some simple maintenance tips to help, courtesy of our friends at Real Simple.
Make sure seals are clean and free from food particles. Clean them once every few months using a toothbrush dipped in a solution of water and baking soda.
Empty your ice bins once a month to prevent ice build-up and keep ice from absorbing food odors. An open box of baking soda in both the fridge and freezer will also help absorb strong odors and keep your fridge smelling fresh. Be sure to replace the water filter as soon as the sensor alerts you.
Check that your fridge is level by placing a level on top and adjusting the feet if needed. An uneven fridge may not close properly, which can both strain the motor and cause condensation.
Typical ideal temperatures for your fridge range from 37 to 40 degrees Fahrenheit and 0 degrees for your freezer, or check your owner’s manual for the manufacturer’s recommendation. The manual should also include instructions for vacuuming the condenser coils if they have become clogged or dusty.
What to Look for This Week
Housing data will dominate the headlines throughout the week, as the NAHB Housing Market Index for May releases on Monday, followed by April’s Housing Starts and Building Permits on Tuesday and Existing Home Sales on Thursday. Weekly Initial Jobless Claims remain critical to monitor when the report also releases Thursday, as usual.
The Bond market will close early at 2:00 pm ET Friday, ahead of the Memorial Day weekend, while Stocks will be open for a full trading session.
The Fed continues to purchase Mortgage Backed Securities in line with its goal of stabilizing the markets. MBS have been trading in the middle of a wide range between support at the 50-day Moving Average and overhead resistance at the 25-day Moving Average. While there may be some volatility within this range, it shouldn’t be too extreme until either the ceiling or floor are tested. The 10-year is trading at 0.64% and we will be watching to see if it moves lower towards the all-time low of 0.31%.
Week of May 4th, 2020 in Review
All eyes were on the labor sector, as the ADP Employment Report and Bureau of Labor Statistics Jobs Report for April were released, along with the latest weekly Initial Jobless Claims. The ADP Report was the worst ever on record, showing just over 20 million job losses, while the BLS also reported a record 20.5 million job losses.
The Unemployment Rate increased from 4.4% in March to 14.7% in April. However, it’s important to note that this figure was determined from data compiled during the week of April 12, which is then modeled for the rest of the month. Given the high number of Jobless Claims that have been filed more recently, it is likely the current unemployment rate is actually higher.
Meanwhile, 3.169 million more people filed unemployment claims for the first time during the week ending May 2. This was close to market estimates of 3 million new jobless claims, though the number was 823,000 fewer claims than the previous week. California (+318,000), Texas (+247,000) and Georgia (+227,000) saw the largest increases.
Over in the housing sector, CoreLogic released its home appreciation figures for March, which showed that home prices rose 1.3% from February and 4.5% year-over-year.
Staggering Job Losses in April Jobs Reports
The ADP and BLS Jobs Reports showed the immense economic impact of the pandemic in April. Released on Wednesday, the ADP Employment Report showed that there were 20.236 million job losses, which is the worst on record, though the data was in line with estimates. March’s figure was also revised lower from – 26,594 to -149,000 job losses.
The service sector had the most losses, with just over 16 million, while goods producers fell by 4.3 million. Big businesses with more than 500 employees lost about 9 million jobs. Companies with fewer than 50 employees were down by a little over 6 million and medium-sized firms had 5.27 million jobs lost.
The BLS Jobs Report also showed a staggering 20.5 million job losses in April, and though the figure was in line with estimates, it is still stunning to digest. Diving deeper into the data, it’s important to note that there are two reports within the Jobs Report: the Business Survey, which features the headline job number, and the Household Survey, which is where the Unemployment Rate comes from.
And there is a fundamental difference between these two reports.
The Business Survey is based predominately on modeling, while the Household Survey is done by actual phone calls to 60,000 homes, which means the latter may be more reflective of actual job losses. By comparison, the Household Survey showed there were 22.4 million job losses versus the headline number of 20.5 million job losses from the Business Survey.
Breaking Down Unemployment and Earnings Data
The Unemployment Rate increased from 4.4% to 14.7% from March to April. While there were 22.4 million job losses, over 6 million people left the labor force. However, with the latest labor force figures including the 7 million Initial Jobless Claims filed over the past two weeks, it’s likely that we’re closer to 19.7% unemployment at this time.
The all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part-time for economic reasons, increased from 8.7% to 22.8% in April. The labor force participation rate decreased from 62.7% to 60.2%.
Average hourly earnings increased 4.6% from March to April and 7.9% year over year, while average weekly earnings increased 4.98% on a monthly basis and 7.4% annually. Note that this doesn’t necessarily mean that people were paid more in April, but rather that more lower paying jobs were lost.
Home Prices Still Appreciating
A key home appreciation report was released by CoreLogic, which showed that home prices rose 1.3% from February to March and 4.5% when compared to March of last year. The year-over-year reading increased from 4.1% in the prior report. CoreLogic forecasts that home prices will rise 0.6% in April and 0.5% annually. The states with the highest annual increases in March were Idaho (11.7%), Arizona (8.2%) and New Mexico (7.6%).
Frank Martell, President and CEO of CoreLogic, said, “The CoreLogic U.S. Home Price Index is predicted to remain largely unchanged over the next year or so after a long uninterrupted run of appreciation. Although the economic fallout from lockdown orders, put in place to fight the spread of COVID-19, will be profound, the basic supports for a rebound in home purchase activity remain in place. Once the shelter-in-place policies are lifted, we expect millennials, who submitted home-purchase applications well into the crisis, to lead the way back to a positive, purchase-driven housing cycle.”
While the CoreLogic forecast is a bit lower than some others, we think that there are strong supply and demand dynamics in place for housing that will aid with appreciation. However, the level of appreciation will be impacted by how long the record levels of unemployment persist.
Family Hack of the Week
If extra art projects have become the norm around your house in recent weeks, you may be looking for some unique ways to display them. Here are just a few ideas from HGTV.
Create a gallery wall with display rails to easily add new artwork. Your kids can even personalize their section of the gallery by adding foam letters or other decorative elements for their names.
Clipboards can serve double duty as a quick-change frame. Add several on a wall or shelf and simply clip on new pieces as your kids draw or color them.
Digital photo frames are especially handy if wall space is at a premium. Snap photos of your kids’ artwork, load them into the frame and enjoy the digital display.
What to Look for This Week
Weekly Initial Jobless Claims will once again be the key report to look for when it releases as usual on Thursday. We will also get an update on consumer and wholesale inflation for April via the Consumer Price Index on Tuesday and the Producer Price Index on Wednesday. Expect inflation to once again show declines due to the lack of pricing pressure.
Ending the week on Friday, we will get a look at new construction data from the NAHB Housing Market Index. Friday will also bring the latest on Retail Sales for April, plus May Consumer Sentiment and manufacturing data for the New York region via the Empire State Index, which will all likely reflect the continuing impact of the pandemic on our economy.
The Fed continues to stabilize the Mortgage Backed Securities market through its purchases; however, MBS did fall below their 25-day Moving Average last week. They ended the week trading sideways in a wide 93bp range between support at the 50-day Moving Average and near resistance at the 25-day Moving Average. The 10-year is trading at 0.66% and we will be watching to see if it moves lower towards the all-time low of 0.31%.
Week of April 27th, 2020 in Review
A slew of economic data was released last week, giving us even greater insight into the pandemic’s impact on our economy. Most significantly, the latest Initial Jobless Claims showed that 3.8 million people filed unemployment claims during the week ending April 25, which was close to market estimates. Factoring in the number of new claims, continuing claims, and the amount of people in the labor force, we estimate there to be a staggering 17% unemployment rate!
The first look at first quarter GDP was also released, showing that our economy contracted by -4.8% in January through March of this year. This was the weakest reading in more than 10 years … and is likely just the tip of the iceberg compared to what the figures for the second quarter will be.
The Fed held its regularly scheduled meeting and, as expected, left its benchmark Fed Fund Rates at zero. Among other things, the Fed noted that inflation is being held down by weaker demand and significantly lower oil prices, which was confirmed in the latest Personal Consumptions Expenditures report.
Over in the housing sector, Pending Home Sales, which measures signed contracts on existing homes, decreased by 20.8% in March, much worse than expectations. However, the accompanying news release did have some positive takeaways, as did the latest Case-Shiller home price index, as detailed below.
First Look at First Quarter GDP
The advanced or first look at first quarter GDP showed that our economy shrank by -4.8%, which was the weakest reading since March 2009. This reading is especially significant when you consider that GDP fell that much even though we likely only saw the pandemic’s impact during the second half of March.
While this certainly means we will see a much bigger decline in GDP in the second quarter, the real question is will see a rebound in the third quarter if and when the economy re-opens?
Pending Home Sales Plunge But Offer Glimmer of Hope
Pending Home Sales, which measures signed contracts on existing homes and is a good leading indicator for Existing Home Sales, were down almost 21% in March … well worse than the shot in the dark estimates of -13.6%.
“The housing market is temporarily grappling with the coronavirus-induced shutdown, which pulled down new listings and new contracts,” said Lawrence Yun, NAR’s chief economist.
However, Yun noted that, “As consumers become more accustomed to social distancing protocols, and with the economy slowly and safely reopening, listings and buying activity will resume, especially given the record low mortgage rates.”
On home prices, Yun also shared some positive insight, explaining, “Although the pandemic continues to be a major disruption in regards to the timing of home sales, home prices have been holding up well. In fact, due to the ongoing housing shortage, home prices are likely to squeeze out a gain in 2020 to a new record high. I project the national median home price to increase 1.3% for the year, though there will be local market variations and the upper-end market will likely experience a reduction in home price.”
Home Appreciation Data Also Shows Important Cushion
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, for February was released. Of its various indexes, it’s especially important to note the National Index and the 20-city Index.
The National Index, which covers all nine U.S. Census divisions, reported a 4.2% annual gain in February, which was an increase from 3.9% in January. Meanwhile, the 20-city Index increased from 3.1% to 3.5% on a year over year basis. Phoenix (7.5%), Seattle (6%), Tampa (5.2%) and Charlotte (5.2%) led the gains.
While this data is old and does not reflect circumstances since the pandemic began, it does show that the housing market was really accelerating beforehand. This is critical because it provides a big cushion for housing on a year over year basis. Annual appreciation went from 3.2% in November, to 3.7% in December, to 3.9% in January, and now 4.2% in February. Hopefully, this may prevent gains from going negative.
The Latest on the Fed and Inflation
The Fed held its regularly scheduled meeting and, as expected, left its benchmark Fed Fund Rates at zero. The Fed said that it is “committed to using its full range of tools to support the US economy in this challenging time, thereby promoting its maximum employment and price stability goals.” The Fed also said it would continue to purchase Treasuries and MBS “in the amount needed” and it noted that inflation is being held down by weaker demand and significantly lower oil prices.
This was confirmed by the release of the Fed’s favorite measure of inflation, the Personal Consumption Expenditures (PCE) Report. The data for March showed that headline inflation dropped from 1.8% to 1.3% year over year, which was expected due to the decline in oil prices and lack of pricing pressure. The Core rate, which strips out volatile food and energy prices, dropped from 1.8% to 1.7%. We expect this reading to continue to fall moving forward.
Family Hack of the Week
Sunday, May 10 is Mother’s Day and if having brunch or dinner in-person with your mom this year isn’t possible, sharing a meal still is, thank to these tips from Martha Stewart for cooking a virtual meal together.
First, pick a dish that utilizes pantry staples or easy to find ingredients and keep it simple, so you can balance time to chat and catch up with time to focus on all the prep work. You could also go for a challenge and pick a recipe your family hasn’t made before and compare what is and isn’t working as you cook. Alternatively, a family favorite recipe is a great choice and can help with a sense of family traditions.
If a full brunch or dinner seems daunting to do virtually, instead you could plan to bake together, which is a great choice if kids want to be involved.
And once your recipe of choice is in the oven or simmering on the stove, you can use the time to share family stories and other cherished memories.
What to Look for This Week
The labor sector will be the main focus of the week, with several key reports ahead. First up on Wednesday, look for the ADP employment report for April, which will be followed Thursday by the latest Initial Jobless Claims figures. Friday, the big news will be the Bureau of Labor Statistics Jobs Report for April, which includes non-farm payrolls and the unemployment rate. The estimate, which is really anyone’s guess, is for 20,000,000 job losses while the unemployment rate is expected to rise from 4.4% to 14%. However, this report is for April and was put together the week of April 12, so expect the figure to undershoot the real picture.
The Fed has done a good job of stabilizing the Mortgage Backed Securities market through its purchases, helping MBS to continue to trade in a sideways pattern in a range between support at the 25-day Moving Average and overhead resistance at the all-time closing high of 104.656. The 10-year is trading at 0.62% and we will be watching to see if it moves lower towards the all-time low of 0.31%.
Week of April 20th, 2020 in Review
More government stimulus is on the way, as Congress passed and President Trump signed into law the latest bill to help our struggling economy. Specifically, the bill includes more than $320 billion for the Paycheck Protection Program (PPP), which will help small businesses retain or rehire workers and will ultimately help the housing market. Funding for hospitals and testing was also included in the package.
This bill is especially timely, given that the latest Initial Jobless Claims showed that 4.4 million people filed for unemployment for the first time during the week ending April 18. This is a staggering number, as is the growing unemployment rate, which we breakdown in detail below.
Sales of new and existing homes also began to reflect the pandemic’s impact on the housing sector in March. Even with a strong beginning of the month, Existing Home Sales fell 8.5% while New Home Sales plummeted 15.4%. Orders for Durable Goods, which reflects new orders placed with domestic manufacturers for delivery of factory hard goods, also fell 14.4% in March, worse than expectations of an 11.7% decrease.
Finally, the Federal Housing Finance Agency released home appreciation figures for February, and while the data pre-dates the pandemic, there is a positive takeaway as noted below.
The Latest on Jobless Claims
Initial Jobless Claims once again reached into the millions, as 4.4 million people filed claims for the first time during the week ending April 18. This was down a million from the 5.2 million people who filed claims for the first time during the week ending April 11.
Let’s take a moment and look at what this means regarding the unemployment rate. There is a total of 164 million people in the labor force. Before the pandemic began, our unemployment rate was 3.5%, meaning that 5.6 million people were unemployed before the pandemic shutdowns were enacted.
In recent weeks, 26.5 million jobless claims have been filed. When we add that to the 5.6 million people who were unemployed before the pandemic, the total number of people unemployed is around 32 million. This equates to 20% unemployment given the number of people in the labor force.
However, we need to factor in the number of people coming back to work, possibly helped by the Paycheck Protection Program (PPP). When we look at continuing jobless claims from two weeks ago and add the new claims from the latest two weeks, the total number of jobless claims actually totals 25.6 million, not 26.5 million. This means almost 1 million people went back to work.
We estimate the unemployment rate to really be around 18.5% … maybe helped by the PPP a bit.
Home Sales Plunge
Existing Home Sales for March were down 8.5%, but according to the National Association of REALTORS®, sales during the first half of March were strong so the data does not reflect the full picture factoring in the pandemic. Also, closings in March are reflective of contracts that were signed in January and February, and buyer traffic has slowed a lot since then.
While it’s certainly anyone’s guess, projections are that sales could fall 30% to 40% over the next few months, and possibly be down 10% year over year depending on how long the economic shutdown lasts.
The median home price was reported at $280,600, up 8% year over year. Note this is not appreciation, as it’s the middle-priced home, meaning that half the homes sold above and half below this figure.
New Home Sales, which measures signed contracts on new homes, did not fare any better, plunging 15.4% from February to March. This was the largest monthly percentage decline since July 2013.
A Note on Home Appreciation
The Federal Housing Finance Agency released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Home prices rose 0.7% in February and 5.7% year over year. Of course, this is old data, but it does show how strong the housing market was before the pandemic began. We should expect home prices to take a hit due to job losses and lack of demand, but the 5.7% annual appreciation does provide some cushion and may prevent gains from going negative.
Family Hack of the Week
With the weather warming and schools still closed in many areas, you may be looking for some new backyard activities your kids can enjoy. Our friends at HGTV shared these ideas.
Your kids can still enjoy the fun of camping, but safely in your own backyard. Set up a tent and bring all the usual camp side fun, like binoculars, musical instruments and, of course, all the ingredients for s’mores.
If you have a plastic pool or sandbox your kids no longer use, help them turn it into a fruit or veggie garden that they can water daily and pick anything that’s ready to eat.
Most kids love sidewalk chalk, and you can make their daily drawings both fun and educational by encouraging them to draw a scene from a favorite book or movie.
Everyone loves a good scavenger hunt. You could hold weekly scavenger hunts in your backyard, and even tie the items your kids need to find to some of their lessons from school.
What to Look for This Week
Weekly Initial Jobless Claims will once again be a key data point to look for when it releases as usual on Thursday.
The rest of the week is equally busy. On Tuesday, we’ll get a read on how the consumer is feeling via Consumer Confidence for April, while first quarter GDP releases Wednesday. In housing news, the Case-Shiller Home Price Index for February releases Tuesday with March’s Pending Home Sales following on Wednesday. Thursday and Friday bring key manufacturing reports for April via the Chicago PMI and ISM Indexes, respectively.
On Thursday, we’ll also get a look at the Fed’s favorite measure of inflation, Personal Consumption Expenditures, along with Personal Income and Spending for March. And speaking of the Fed, their regularly scheduled two-day meeting will end Wednesday with the usual meeting statement.
The Fed’s buying of Mortgage Backed Securities continues to stabilize the markets, as Mortgage Bonds are still trading sideways in a range between support at their 25-day Moving Average and overhead resistance at 104.656, which is the all-time closing high for MBS. The 10-year is trading at 0.60% and will likely move lower towards the all-time low of 0.31%.
Week of April 13th, 2020 in Review
The continuing impact of the COVID-19 pandemic was evident across a wide-range of the U.S. economy in the latest week, as data for a variety of sectors was released.
Like the previous three weeks, Initial Jobless Claims once again climbed into the millions, as 5.25 million people filed for unemployment during the week ending April 11. This means the 4-week tally of claims has hit a nearly unfathomable 22 million people!
The housing sector did not fare much better as the NAHB Housing Market Index, which is a real-time read on builder confidence, saw its largest one-month drop ever. New home construction was practically stymied in March as well, with Housing Starts and Building Permits showing big declines.
March Retail Sales were also walloped, dropping 8.7% to the lowest read ever on record, while manufacturing in the New York and Philadelphia regions also plunged, with the Philadelphia Fed Index actually hitting its lowest level in 40 years.
Millions More Initial Jobless Claims Filed
Initial Jobless Claims totaled 5.25 million for the week ending April 11, down slightly from the 6.6 million claims filed during the prior week. These numbers are still alarming but off the peak seen in previous weeks.
Let’s take a moment to dive deeper into the numbers. There are 160 million people in the labor force and over the last four weeks, we have seen 22 million people file unemployment claims. Before the pandemic caused this spike in jobless claims, the unemployment rate was 3.5%, meaning that 5 million people were unemployed before the pandemic began.
So, when we factor in the number of people who were unemployed before the pandemic with the claims filed in the last four weeks, there are around 27 million people who are now unemployed. This equates to 17% unemployment, but the reality is this number is going to continue to rise. It’s likely unemployment may exceed 20%, which we would reach if 32 million people file jobless claims. Sadly, this seems very realistic now.
Builder Confidence and Home Construction Hit Hard
The NAHB Housing Market Index, which is a real-time read on builder confidence, dropped a whopping 42 points to 30 in April. This was well below the shot in the dark estimate of 55 and the largest one-month drop ever!
Note that a reading of 50 is the baseline, with a number above it signaling expansion and below signaling contraction. The index tracks three components, and all saw big declines. Current sales expectations fell 43 points to 36, sales expectations for the next six months dropped 39 points to 36, and buyer traffic dropped 43 points to 13.
The NAHB stated the obvious, “This unprecedented drop in builder confidence is due exclusively to the coronavirus outbreak across the nation, as unemployment has skyrocketed and gaps in the supply chain have hampered construction activities.”
Data on home construction confirms this sentiment, as Housing Starts for March plummeted 22.3% while Building Permits, which are a sign of future construction, fell almost 7%.
Manufacturing and Retail Sales Also Plummet
March Retail Sales dropped 8.7% to the lowest read ever on record. Not surprisingly with all the store closings, sales plunged nearly 51% at clothing stores, 20% at department stores and 27% at furniture stores. Restaurants and bars also saw a 27% drop in sales, which will likely fall even more in April as many restaurants have closed but for take-out and delivery. Auto dealers were also impacted, with a 27% plunge in sales while sales at gas stations dropped 17%.
The manufacturing sector also felt the impact of the virus, as the Empire State Index (which measures manufacturing activity in the NY region) for April was reported at -78.2, much lower than expectations of -35. Meanwhile the Philadelphia Fed Index plunged to its lowest level in 40 years.
Home Hack of the Week
If your grill has sat idle all winter, get it ready for the warmer weather with these cleaning guidelines from our friends at Taste of Home.
First, give your grill a once over. Check for rust as well as any bugs that may have nested during winter. Inspect hoses and replace any that have cracked or frayed.
Next do a deep clean. Turn on the grill for 15 minutes, which will make it easier to brush off any leftover buildup from the grates. Instead of using a brush (which could leave small bristles that can get in your food), cut an onion in half and rub it over the warmed grates with barbecue tongs until stuck-on particles break loose. Not only will this clean your grill, it will season it as well.
If any stuck-on grit remains, soak cooled grates in a bucket of warm, soapy water for several hours. Then use a stainless steel or manufacturer-recommended cleaner to degrease the outside of your grill and help protect it all season long. Also, take a moment to make sure all your grill tools are in working order. Replace any as needed and deep clean everything before using.
For some extra fun, let each family member pick an item on the menu for your first grill-out. Consider hosting a virtual barbecue so friends and family can join you online with a barbecue of their own.
What to Look for This Week
Once again, weekly Initial Jobless Claims will be the key report to watch when it releases Thursday. If we see another week of 5 million Initial Jobless Claims filed, we will be at or near 20% unemployment.
More housing news also follows, when Existing and New Home Sales for March will be reported on Tuesday and Thursday, respectively. Expect these figures to show sharp drops. The FHFA House Price Index will also be released, but this will be for February and will likely not show the current environment.
Ending the week on Friday, look for Durable Goods Orders for March and Consumer Sentiment for April.
The Fed has done a good job of stabilizing the markets, as Mortgage Bonds continue to trade sideways in a wide range between support at the 25-day Moving Average and overhead resistance at 104.656, which is the all-time closing high for Mortgage Backed Securities. At the moment, MBS are only about 60bp from this level. The 10-year is trading at 0.60% and will likely move lower towards the all-time low of 0.31%.
Week of April 6th, 2020 in Review
The COVID-19 pandemic continues to wreak havoc on the labor sector. The latest Initial Jobless Claims filing was another whopping number, coming in just shy of the record filings set in the previous week.
Inflation news also made headlines, as the wholesale-measuring Producer Price Index and the more important Consumer Price Index for March were released. As expected, inflation fell in March due to the lack of pricing pressure.
The National Federation of Independent Businesses released their small business optimism index for March, and it’s no surprise that it fell to 96.4 from 104.5. This is the lowest level since October 2016, with the decline from February the largest on record. The NFIB explained the obvious: “The outbreak has left few, if any, owners unscathed. The economic impact is immense, and now, the questions are how long will it last and how quickly can the small business sector recover once on the other side.”
CoreLogic released its home appreciation index for February and while this lagging report pre-dated the pandemic, there is a key – and positive – point to take away from it, as noted below.
Initial Jobless Claims Second Highest Ever
The latest Initial Jobless Claims report showed that 6.6 million people filed claims during the week ending April 4. This is just below the 6.8 million recorded for the week ending March 28, which was actually revised higher by just over 200,000 claims. It is possible claims for the week ending April 4 could also be revised higher, perhaps even marking a new record high.
For the last three weeks, Initial Jobless Claims have equaled 6.6 million, 6.8 million and 3.3 million respectively, for a staggering nearly 16.8 million total job losses. Unfortunately, this number is expected to climb as much of the economy remains shutdown.
Inflation Falls in March
As expected, inflation decreased in March due to the lack of pricing pressure. On the wholesale level, the Producer Price Index declined by 0.2% while Core PPI, which excludes volatile food and energy prices, also fell 0.2%.
At the consumer level, the Consumer Price Index (CPI) dropped by 0.4%, which was more than the expected 0.3% decrease and the biggest decline in five years. On an annual basis, the rate of inflation decreased by 0.8% to 1.5% when compared to March of last year.
Core CPI, which again strips out volatile food and energy prices, decreased by 0.1%. This was the first decline in 10 years. Core inflation also decreased by 0.3% to 2.1% year over year.
Again, we should expect inflation numbers to go down while the lack of pricing pressure remains. We also need to keep a lookout for signs of deflation, which is a decrease in the general price level of goods and services.
A Takeaway on Home Appreciation
CoreLogic released their home price index, which is an important appreciation report. The data showed that home prices rose 0.6% in February and 4.1% annually, which was an increase from 4% in the prior report. The cities with the highest annual basis increases were Washington DC (4.8%), Boston (4.5%) and Los Angeles (4.3%). While this report pre-dated the pandemic, the key takeaway is that it highlights just how strong the housing sector was beforehand.
Interestingly, CoreLogic did not report their usual forecast for appreciation over the next 12 months, due to the uncertainty caused by the coronavirus. However, before this last report, they were forecasting over 5% appreciation in the next 12 months. Housing is typically a long-term investment, and while we may see a bit of a dip in appreciation over the next year, we expect housing to lead the recovery.
Family Hack of the Week
With many schools now officially closed for the remainder of the spring and stay at home orders in effect throughout much of the country, it is understandable if kids are feeling a bit antsy. If you’re looking for some fun, online activities to do with your kids, here are two free resources for cooking together.
Every weekday at 1 pm ET, Delish’s editorial director Joanna Saltz and her kids will be cooking together on Instagram live. And no need to worry if you can’t join them live, as the videos will be saved on their Instagram feed for 24 hours. Visit @delish on Instagram to learn more, and this article to find out what they’ll be cooking each week.
Jamie Oliver’s young son, Buddy, also has a series of cooking videos on Jamie’s YouTube channel with some great options for cooking with kids. Check out the playlist here
https://www.youtube.com/playlist?list=PLcpoB2VESJme7lSxXEcXyVtFPsMI78lcL. And for more “Get Kids Cooking” options, visit https://www.jamieoliver.com/features/category/get-kids-cooking/.
What to Look for This Week
Once again, weekly Initial Jobless Claims will be the key report to monitor, as record numbers of people filing unemployment claims continues across the country.
There will also be housing data, with the National Association of Home Builder’s Housing Market Index coming out Wednesday, followed by March’s Housing Starts and Building Permits on Thursday.
Over in the manufacturing sector, April’s Empire State Index and Philadelphia Fed Index will be reported Wednesday and Thursday, respectively.
We’ll also get a look at the virus’ impact on Retail Sales when March’s report releases Wednesday.
Week of March 30th, 2020 in Review
March did not go quietly “out like a lamb” this year, with the impact of the COVID-19 pandemic evident in key labor sector reports. The Bureau of Labor Statistics reported 701,000 job losses in March, much worse than expectations, while the ADP report showed 27,000 job losses. Unfortunately, the latest Initial Jobless Claims filings broke another record, almost doubling the record figures from the previous week.
GDP is also feeling the impact. While the early estimates were for first quarter to be down by 6%, this has been revised to -9%. Meanwhile, second quarter GDP is expected to be down 34%. This is shocking and clearly spells a recession this year.
Also of note, the CARES Act is providing help for homeowners struggling with their mortgage payments. While this is great news, it’s important to understand key differences between mortgage forbearance and mortgage forgiveness, as explained below.
The Fed continues its asset purchase program, which includes purchases of Mortgage Backed Securities. Last week, the Fed bought enough MBS for market stability, but not too much, which is a positive development that can hopefully prevent problems for lenders, including margin calls.
Initial Jobless Claims Hits Record High … Again
The numbers are in … and, as anticipated, they aren’t pretty. Initial Jobless Claims showed that 6.6 million individuals filed for unemployment benefits for the first-time in the latest week. This was much higher than most estimates and almost double the previous report.
And these numbers will continue to climb, as New York only reported 366,000 claims and California only 878,000 in this report. These figures are obviously very low for those respective states and leads us to believe that many people have not filed yet in those areas but will.
Job Losses Roar On
The ADP Employment Report showed that there were 27,000 job losses in the month of March. Believe it or not, this was stronger than expectations, which were calling for 125,000 to 170,000 job losses. Unfortunately, this number will only get worse, as the figures were derived on the 12th of March or earlier, so the number does not fully take into account the effect of the pandemic.
Small businesses accounted for all of the reductions, slicing 90,000 from payrolls, with 66,000 of those reductions coming from companies that employ 25 people or less. Medium-sized businesses (with between 50 and 499 employees) added 7,000 jobs while big companies hired 56,000. Again, this has changed since March 12, and April’s report will more fully reflect this.
The Bureau of Labor Statistics (BLS) reported that there were 701,000 job losses in the month of March, which was much worse than expectations of approximately 150,000 losses. Let’s unpack what this means.
There are two reports within the Jobs Report: the Business Survey where the headline job number comes from and the Household Survey where the Unemployment Rate comes from. The Household Survey also has a job loss component.
There is a fundamental difference between these two surveys. The Business Survey is based predominately on modeling, while the Household Survey is done by actual phone calls to homes, meaning it may be reflective of actual job losses.
Why is this significant? While the headline number from the Business Survey showed 701,000 losses, that figure is likely very understated. Remember that there have been 10 million individuals who filed for unemployment benefits over the past 2 weeks – so the losses have to accelerate. Meanwhile, the Household Survey showed that there were almost 3 million job losses.
The Household Survey also reported that the Unemployment Rate increased from 3.5% to 4.4% but keep in mind that over 1.6 million people left the labor force. The Unemployment Rate would have been much higher if we didn’t have so many people leave the labor force.
The all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part-time for economic reasons, increased from 7% to 8.7%.
Rounding out the report, average hourly earnings increased from 3.0% to 3.1% on an annual basis, probably because lower-paid workers were cut first. Hours worked, however, fell by 0.2 hours. The more important weekly earnings figure, which takes this into account, was down from 3% to 2.2%.
The labor sector is certainly feeling the brunt of the pandemic, and upcoming reports will likely show this even more, once the data fully reflects the virus in full swing.
Take “CARE” Regarding Forbearance
The Government has created the CARES Act to assist homeowners whose income may have been adversely impacted by the COVID-19 virus. This includes the possibility of mortgage forbearance.
However, mortgage forbearance and mortgage forgiveness are not the same thing. Forbearance means that the payments will be suspended for a short period of time, initially up to six months, and then payments will need to be caught up when the forbearance period is over.
Think of it this way. When you buy something at a furniture store, for example, that offers “no payments” for three months, you still must pay for the furniture – the payments are just deferred.
Mortgage forbearance can have dangerous consequences if borrowers fail to catch up on their payments. Lenders can enforce their right to be paid, which ultimately could lead to foreclosure, and borrowers could lose all the equity in their home in the process. That’s why forbearance is designed to help those as a measure of last resort.
Housing Data to Note
Housing data that was reported last week still reflects a pre-virus environment. The Case-Shiller Home Price Index is considered the gold standard for home appreciation and features several important indexes, including the National Index which covers all nine U.S. Census divisions and reported a 3.9% annual gain in January. This was an increase from 3.7% in December. Meanwhile, the 20-city Index increased from 2.8% to 3.1% on an annual basis, with Phoenix (6.9%), Seattle (5.1%), and Tampa (5.1%) leading the gains. Due to the lag time of the report and the impact of the pandemic on the economy, this reading has much less significance than it typically does.
Pending Home Sales, which measures signed contracts on existing homes and is a good leading indicator for Existing Home Sales, were up 2.4% in February. This reading was much higher than the -1.6% expected. Sales were also up 9.4% annually, which is the highest pace in 3 years. Unfortunately, many of these signed contracts may have to be cancelled, but it’s currently unclear the amount and details.
However, NAR’s chief economist, Lawrence Yun said, “Housing, just like most other industries, suffered from the coronavirus crisis, but once this predicament is behind us and the habit of social distancing is respected, I’m encouraged there will be continued home transactions though with more virtual tours, electronic signatures, and external home appraisals.”
Family Hack of the Week
Many people are missing social outings with friends and family, but thanks to the various social gathering platforms, a virtual dinner and a movie or game night together is still possible. Here are some simple tips for having a virtual night in with loved ones near and far.
Pick a social platform that works for everyone. Some easy-to-use options include Zoom, Skype, FaceTime or Google Hangouts. There are plenty of tutorials available for people new to the platforms.
Next, choose a menu that’s easy enough for everyone to make, and doesn’t require too much prep time. This will let you plan to connect on screen ahead of time with appetizers or for “happy hour.” Consider making it a theme or costume night, which can be fun for kids and adults alike. For example, have everyone dress in 80’s clothes or, if you’re planning to stream a movie together after dinner, the meal and attire can be tied into the movie.
Staying connected is so important right now, and these simple ideas for virtual hangouts can help.
What to Look for This Week
Most importantly, we will be looking for updates on some of the studies underway for drugs with a therapeutic response to COVID-19, like Azithromycin and Hydroxycloroquine. We stand hopeful and optimistic.
On the economic news front, Initial Jobless Claims will be the focal point again when it releases on Thursday. Unfortunately, it’s likely to be another whopping, record-setting number.
Inflation reports will also make headlines, as wholesale inflation for March will be reported via the Producer Price Index on Thursday, while the Consumer Price Index follows Friday. We should expect inflation numbers to move lower in these reports and moving forward. This would only make sense because starting in March, which these reports measure, and beyond there really has not been any pricing pressure that would lead to inflation. Inflation happens when you have too many dollars chasing too few goods, causing prices to rise. We are not seeing that, as demand has fallen due to the coronavirus. Expect inflation to turn negative month over month, if not in these reports, then soon.
In addition, there will be a 10-year Note and 30-year Bond Auction, which can influence the markets and tell us where traders believe yields will go. It’s also likely that the rampant volatility we have seen in the markets will continue, depending on the headlines regarding the pandemic.
Mortgage Bonds continue to trade in a wide range between support at the 25-day Moving Average and overhead resistance at 104.656, which is the all-time closing high for Mortgage Backed Securities. Where MBS stand now, they are only about 80bp from this level. The 10-year is trading at 0.60% and will likely move lower towards the all-time low of 0.31%.
Week of March 23rd, 2020 in Review
Help for many businesses and individuals is on the way as, after much negotiation, Congress passed and President Trump signed into law the massive $2 trillion dollar stimulus bill to stem the economic fallout from the Covid-19 pandemic. Among other things, the bill includes direct payments to individuals, expanded unemployment insurance and help for small businesses.
With weekly Initial Jobless Claims surging to a record high of 3.28 million individuals filing for unemployment benefits for the first time in the latest week, this relief will be a welcome glimmer of hope to many who have lost jobs and are fearful about paying their bills.
The Fed also said that it will continue its asset purchase program “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”
Economic data has taken a back seat to the current fallout from the pandemic, but of note, two important housing reports were released, New Home Sales and the Federal Housing Finance Agency Home Price Index. While data does not reflect the current environment, there is a key take away from both as explained below. Also, the Final reading of Q4 GDP, even though not important anymore, was reported at 2.1% as expected.
Trials are taking place on a combination of drugs that are thought to help cure the virus within 3-7 days. We will continue to watch for results.
What’s in the Coronavirus Stimulus Bill?
Here is a recap of how the Coronavirus Stimulus Bill will help families:
Direct payments will be sent to individuals making $75,000 or less of up to $1,200 ($2,400 for couples making up to $150,000) with an extra $500 per child. Assistance will start to phase out for people earning more than these amounts.
Unemployment benefits will be expanded, increasing by $600 a week for up to four months. People could also get an additional 13 weeks of unemployment if they remain unemployed after state benefits end.
Homeowners with federally-backed mortgages will be protected from foreclosures for at least six months.
Students with federal loans can suspend payments until October.
Businesses will also get assistance, with small businesses gaining access to a nearly $350 billion loan program to cover things like payroll, rent and utilities. The loans will not have to be repaid if businesses keep their employees. The help will be retroactive to February 15, 2020, giving employers a chance to bring back employees.
An additional $500 billion will be available to businesses in hard-hit industries. Companies that receive assistance will not be allowed to increase executive pay or buy back stocks. In addition, businesses controlled by the president, vice president, members of Congress and heads of federal agencies do not qualify for loans.
In the coming days, we should learn more about the timing and methods for these cash payments. President Trump has said he wants them distributed quickly.
Also of note, Treasury Secretary Steven Mnuchin announced that he has formed a task force of U.S. financial regulators to deal with the liquidity shortfall that mortgage service firms may face as countless homeowners stop making their monthly payments. This is an important and positive development for the mortgage industry during this time.
Initial Jobless Claims Hits Record High
The latest Initial Jobless Claims showed that there were a whopping 3.28 million individuals who filed for unemployment benefits for the first time last week. This was much higher than the 1.5 million consensus and even higher than Goldman Sachs’ estimate of 2.2 million.
One thing this volume does show was that, despite concerns, the unemployment system was able to handle many more claims than thought. With that being said, the real number is probably much greater than 3.28 million, as it’s likely all the claims were not processed.
The silver lining, as noted above, is the Stimulus bill extends the term of benefits to 39 weeks, an increase from 26 weeks, if needed. Filers will also receive an additional $600 per week on top of the normal benefits they would receive.
The Key Take Away From Housing Data
February New Home Sales were down 4.4% on a monthly basis, but that is due in part to January’s already strong report, which was was revised even higher from 764k units to 800k units. Factoring in the revision, sales of new homes were actually a little higher than the originally reported number for January. February sales were up a strong 14.3% when compared to February of last year.
While this data is not reflective of the current environment, it’s important to note how strong housing has been. Housing has been solid, both on the new construction front and from what we saw in last week’s Existing Home Sales report as well. This is meaningful because as we head into an inevitable slowdown, and housing may see a temporary downturn, this housing market can sustain it.
This is not a scenario like the last recession where the Housing Bubble brought us into recession and junk loans were being done. After a short downturn, we expect housing to continue to show the strength it showed prior to the coronavirus, which could be a great opportunity for many people once this is all over.
Similarly, the FHFA (Federal Housing Finance Agency) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. While there can be a one-million-dollar home with a conforming loan amount, for the most part, this report specifically represents more of the lower-priced homes. So it should be no surprise that this report was even hotter than Case-Shiller, showing that home prices rose 0.3% in January and 5.2% on an annual basis. The year-over-year reading was unchanged from the previous report and remained at extremely strong levels.
Again, this is just another report showing that we headed into the Covid-19 pandemic with a solid housing market that should be resilient.
The Latest Inflation News
The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation increased 0.1% for the month of February and remained at 1.8% on an annual basis.
The Core rate, which strips out food and energy prices and is the most important reading that we focus on, was up 0.2% for the month. Year-over-year Core PCE increased from 1.7% to 1.8%.
Also of note, February Personal Income and Spending showed that incomes were up 0.6%, which was better than the 0.4% expected. Spending was up 0.2%, which was in-line with expectations.
Again, all of this data is for February, before the coronavirus effects really took place. Expect inflation numbers to go down as there is no pricing pressure out there. In fact, there are concerns we could see deflation occur, which is a decrease in the general price level of goods and service.
Remember that inflation news is always important to monitor because it reduces the value of fixed investments. This includes Mortgage Bonds, to which home loan rates are tied. And PCE will be a very important report to watch as things recover, as demand could come back ahead of supply.
Look at it this way: Once things start to turn around, consumers will start having stronger demand for products and services and the supply of those goods and services will likely lag behind. That’s why, once we see a recovery starting, we could see temporary periods of higher inflation.
Housing Hack of the Week
Spring is officially here, which means it’s important to schedule some seasonal maintenance on your home. Here are just a few items to tick off your list as the weather starts to warm.
Keep bugs away by making sure there aren’t any standing areas of water in your yard, which can be a breeding ground for mosquitoes and other pests. Also, if you notice any areas where water could pool, add soil to prevent both bugs and flooding.
Clear any debris from gutters and make sure none are loose or leaking. Also, double check that downspouts will drain away from your foundation, which is especially important if you’re in an area known for spring showers.
Make sure your screen doors and windows are free of any holes or tears. Also, check your outside faucets, hoses and sprinklers for frost damage to ensure they will work properly.
What to Look for This Week
The labor sector will be in the headlines again, as the ADP Jobs Report for March releases Wednesday followed by the Bureau of Labor Statistics Jobs report on Friday. Thursday will bring the latest weekly Initial Jobless Claims and all eyes will be watching to see if another record is set.
Also, look for housing news via Pending Home Sales on Monday and the Case-Shiller Home Price Index Tuesday. In manufacturing news, Chicago PMI releases Tuesday while the ISM Index will be reported on Wednesday.
Expect market volatility to continue, as additional cities across the country could become new hotspots for the virus. Stay safe, be well and remember to keep practicing social distancing!
Mortgage Bonds are quite literally in uncharted territory as they set new all-time highs yesterday in reaction to the Fed’s purchases of Mortgage Backed Securities. The chart below shows how new all-time highs were set on several days, as well as new all-time closing highs. Unfortunately, the lower rates that should be associated with this are not being passed to the consumer because lenders are having capacity issues. There is just too much volume trying to be pushed down the system…And lenders / servicers have their own set of difficulties and they are getting crushed by the government’s new mortgage payment forgiveness and have to front the money.
The charts will once again this week take a back seat to the news headlines and updates on the potential for an effective treatment. Last week testing began on a combination of Hydroxychloroquine and Azithromycin, which has shown promising results in the French study. We are expecting to see results here as early as Wednesday…Fingers crossed.
Week of March 16th, 2020 in Review
The start of spring ushered in continued market volatility, with Stocks and Bonds both experiencing wild swings throughout the week. Trading was halted for 15 minutes on Wednesday when the markets plunged 7%, triggering a circuit breaker for Stocks. Typically, when Stocks fall, Bonds improve, but these are not typical times as we explain in detail below.
The housing sector reported positive data in the form of Housing Starts, Building Permits and Existing Home Sales…13-year highs in fact. While this normally would have been cause for celebration, these figures were for February and reflect pre-virus behavior. Expect this data to be very different in future reports this spring due to the ongoing effects of the Covid-19 virus.
The manufacturing sector, which was already slowing, has shown additional signs of weakness due to the virus. Both the Empire State and Philadelphia Fed Indexes for March came in much lower than expectations and February’s readings. Same for Retail Sales in February, which were lower than the gains anticipated. And Initial Jobless Claims spiked to a 2.5 year high and will unfortunately take another huge leg higher in this week’s report.
Ongoing Market Swings
Last week saw periods where both Stocks and Bonds declined. Typically, when Stocks fall, the Bond market is a safe haven for traders. This means that investors normally would take their money out of riskier assets during times of uncertainty and put them into the Bond market, which is considered safer, brining Mortgage Backed Securities and Treasuries higher in price and lower in yield or interest rate. But this pattern has been broken of late. Let’s unpack why-
The Stock market’s dive lower has resulted in a lot of margin calls. Remember that investors can margin their Stocks up to 50%. For example, if an investor opens a $50,000 margin account, they can purchase up to $100,000 of a marginable security. Margin accounts also require an amount of available cash or equivalent value known as a maintenance margin. If your Stocks value goes down, you may get a margin call, where you have to come up with cash. And it’s these margin calls that are causing many to dump everything, including Bonds and Treasuries, to come up with the money.
Additionally, the at least $1T in stimulus that the Fed is planning on rolling out has to be paid for. The way the Treasury raises money is by selling Treasuries. If you have much more supply of Treasuries coming onto the market, it will drive prices down and yields higher. Think about it – There is likely some demand for Treasuries already, but there is not enough to sop up the massive additional supply. There is an “equilibrium price” where demand will meet supply eventually, but it’s a lower price. Remember that Bonds have an inverted relationship when it comes to price and yield – As price goes down, yield goes up, and vice versa. The move higher in Treasury yields has caused yield in the overall Bond market to rise, including home loan rates on mortgages.
Oftentimes, a country’s debt suppresses interest rates, so one may wonder why the stimulus plan is not having that effect in this scenario. This holds true when there are manageable levels of debt acceleration – This is a shock to the system, flooding the market with a lot of paper. And while there are buyers, if there is more supply than buyers, prices have to drop to get the demand to come in.
Treasury Secretary Steven Mnuchin, who meant well, said if we don’t take some of the measures we are now, unemployment could hit 20%. The market looked at that and said will mortgages be paid? Will we have delinquencies or foreclosures?
Due to the strong housing market we have seen, people do have a good cushion and a lot of equity, which will help. But this is a job security and potential repayment issue and there may be a period of time that housing suffers a bit. If you are a creditor, like the Bond market, you have to take that risk and calculate that into your price.
These two reasons are why home loan rates have taken a move higher, even in the face of Stocks declining.
The latest Initial Jobless Claims report showed that there were 281,000 individuals who filed for unemployment benefits for the first-time. This was the highest figure in 2.5 years and was 70,000 higher than the previous report. Unfortunately, this is just the beginning and we expect these numbers to rise.
In fact, on Friday, Goldman Sachs estimated that the next Initial Jobless Claims report, coming this Thursday, will surge 2.25 million…which is quite alarming. For comparison’s sake, during the peak of the financial crisis, the most claims for a week was about 600,000. This would be almost 4 times that. If unemployment does significantly rise, home loan rates may have to move higher because there is greater repayment risk.
The best sign of a recession to come is a spike in the unemployment rate – and the first sign of rising unemployment is a spike in people filing for it. This is likely the first sign we are seeing and will 100% lead to a recession, if we are not in one already.
Interestingly, we don’t know we’re in a recession until about 6 months afterwards, because it takes time to get data to show that we had 2 consecutive quarters of negative GDP.
February Housing Data In the Rear View Mirror
Housing Starts, which measures the start of construction on a home, were down 1.5% in February, while January Starts (which were already a really strong number) were revised even higher by 4% to a 13-year high. Factoring in the revision from January, February Starts were really up 2%. Starts were also up 40% when compared to February of last year. Starts for single-family homes, which are really the life blood of the housing market, were up nearly 7% in February.
Building Permits, which are a good forward-looking indicator of Starts, were down 5.5%. But this is coming off a 13-year high as well, so a slight pullback could be expected. Year-over-year, Building Permits were up 14%. Single Family Permits were up 2%, which is again the most important component.
Existing Home Sales increased by 6.5% in February, coming in at a 5.770 M unit annualized pace. Supply was down 9.8% from a year ago and the median existing home price was $270,100, up 8.0% from a year ago.
However, all of these reports reflect pre-virus behavior.
We should expect that they will be very different in the months ahead due to the continued economic fallout from the virus.
Important Take Away About Builder Confidence
The National Association of Home Builders Housing Market Index dropped 2 points to 72 in March, which is still a strong measure of builder confidence. Breaking down the components of the index, current sales expectations fell 2 points to 79, sales expectations for the next 6 months fell 4 points to 75, while buyer traffic fell 1 point to 56.
The decline in sales expectations for the next six months stems from the economic uncertainty due to the Covid-19 virus. It’s also important to note that half of the builder responses in the March report were collected prior to March 4, so the recent stock market declines and the rising economic impact of the virus will be reflected more in next month’s report.
Also of note, 21% of builders in the survey reported some disruption in supply due to virus concerns in other countries such as China. However, the incidence is 33% higher among builders who responded to the survey after March 6, indicating that this is an emerging issue.
Family Hack of the Week
Looking for interesting but educational ideas to keep kids entertained at home? Many museums around the world offer great ways to explore things online. Here are some more details on just two of them.
The Smithsonian features a world of options for kids to learn online. They can meet the animals at the National Zoo, learning both fun facts about them and conservation status. The Science Game Center provides both games and apps to help kids learn about science while the Learning Lab has more than a million resources for kids to discover and learn about a whole range of topics. Click here to learn more: https://www.si.edu/kids.
Meanwhile the Metropolitan Museum of Art created #MetKids, “made for, with, and by kids and The Met!” Kids can explore The Met using an interactive map, watch behind the scenes videos, try out creative projects and even travel through 5,000 years of art in a time machine. Learn more at https://www.metmuseum.org/art/online-features/metkids/about.
What to Look for This Week
We’ll get more housing news Tuesday when New Home Sales for February are released. On Wednesday, look for Durable Goods Orders while Thursday brings Gross Domestic product for 4Q 2019 and, more critically, weekly Initial Jobless Claims. And on Friday, the Fed’s favorite measure of inflation, Personal Consumption Expenditures, will be delivered along with Personal Income and Personal Spending. The Consumer Sentiment Index for March also will be reported on Friday.
All of this data, with the exception of Initial Jobless Claims, is for the month of February and is in the rear-view mirror before the effects of the coronavirus were more realized. Expect volatility to continue and the markets to react sharply to any new updates or headlines. The technical analysis, which is normally included, is also taking a backseat to the news every day and will be left out in this issue. Be safe out there and do your part to practice social distancing.