Tucson Mortgages Home Loan News 3-23-2020

By Todd Abelson NMLS #180858 on .

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.

 

Recession Indicator

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.