Economist, Alan Nevin is the Director of Economic and Market Research at Xpera. A graduate of Stanford University, Mr. Nevin has a broad background in real estate development, investment and market research. He serves the legal and insurance communities with valuations, market supply and demand and economic loss analyses. His book “The Great Divide” focuses on the future of the U.S. and the industrialized nations of the world.
This week, the economic data, which is inherently backward-looking in nature, finally began to capture signs of the effects of the Coronavirus. At the same time, President Trump signed into law a $2 trillion stimulus package (the “CARES Act”), which will provide support to workers, small businesses, the medical system, and individual taxpayers. Forecasts from reputable economists continue to be revised daily, though the band of potential outcomes remains as wide as ever—a symptom of how much uncertainty remains about the depth, and perhaps more importantly, the duration of the current crisis.
Sharpest Hit to Labor Markets in Recorded History:
Last week, unemployment claims increased by 70,000 and that was a significant percentage increase, but this week they jumped to nearly 3.3 million—the single-largest weekly increase in unemployment ever. This is likely to drive further negative impacts to consumer spending, which is our primary source of economic growth. This new development is largely responsible for the latest round of forecasts being downgraded.
Consumer Confidence Shaken by Unprecedented Stay-At-Home Environment:
Both the Conference Board and the University of Michigan’s indices of consumer confidence/consumer sentiment posted sharp declines this week. The University of Michigan’s index experienced its largest monthly decline since the financial crisis, which suggests that the retail sales figures, which were already down in February, will likely fall significantly during March and generate additional impact to jobs and spending in April.
Daily Home Sales, Listings, and Pending Sales Show Adverse Impact to Real Estate:
C.A.R. has begun tracking sales and listings activity on a daily basis across the state and this data shows double-digit declines in closed transactions in most major regions of California. Although business and transactions continue, some parts of the Bay Area and Southern California have experienced 20-30% declines in both the number of closed transactions being recorded daily and the number of new listings being added to the MLS each day.
REALTORS® Experienced More Market Challenges Last Week:
Virtually all California REALTORS® reported expecting negative impacts on their business, up from roughly half at the beginning of March. As job losses ramped up last week, the percentage of REALTORS® who had buyers withdraw an offer on a property increased to 42%, while the percentage of members who have had clients remove their home from the MLS has risen to 44%. And, although nearly 30% of REALTORS® have had a transaction fall out of escrow due to the Coronavirus, almost half of members surveyed have had a transaction close since March 15.
Mortgage Applications Retreat as Jobless Claims Rise:
The headline number for mortgage applications showed a double-digit increase nationwide compared to one week earlier. However, at the state level, California saw one of the largest declines in new purchase applications, which fell more than 16% from the week before and more than 36% compared with the same week in 2019.
Historically Low Treasury Rates Yet to Benefit Mortgage Borrowers:
Treasury yields remain depressed as investors flock to safety, thereby driving bond prices up and bond rates down. However, those lower rates have resulted in higher spreads between mortgage rates and treasuries rather than savings on housing costs. At the time of this writing, mortgage rates had risen nearly 40 basis points for the week while 10-year treasuries dipped to 0.6%. This suggests that mortgage rates will eventually come down, but there are liquidity, capacity, and cost constraints that are currently keeping the benefit of low rates from being passed on to consumers.
Concerns Grow Regarding Mortgage Availability:
One unintended consequence of the recently enacted stimulus plan is that mortgage credit may become more scarce. With provisions allowing impacted borrowers up to 3 months of forbearance, servicers are exposed to running down their reserves since they are required to remit payments to investors regardless of whether the borrower has made the payments. In addition, with warehouse lines of credit for originators for jumbo and non-QM loans becoming more difficult, originators are pricing in more economic risk as well as higher carrying costs.
CARES Act Represents an Important Step in Coronavirus Response:
President Trump signed the CARES Act into law last week, which will aim to inject up to $2 trillion into our economy in the form of direct rebates to taxpayers, forgivable loans to small businesses, emergency unemployment assistance, as well as many other provisions for small businesses including unemployment benefits for independent contractors like REALTORS®.
Federal Policy Helps to Bolster Financial Markets:
The Dow Jones Industrial Average finished the month of March with its worst quarter in recorded history and the S&P posted its worst quarter since the financial crisis. However, after the passage and signing of the fiscal stimulus, the markets have rebounded modestly. We remain down for the year, but the Dow has remained above 20,000 for the past 7 days consecutively. Volatility is likely to persist, but recent trends show us that the market reacted favorably to the government’s unprecedented action.
Direct Stimulus En Route to Californians:
Part of the fiscal stimulus includes direct payments to taxpayers totaling $1,200 for each individual earning under $75,000 or married couples earning less than $150,000 per year, with reduced benefits for some taxpayers above those thresholds. Although these payments will likely take several weeks to reach bank accounts, they will be critical for consumption smoothing and financing basic necessities for the 3.3 million (and rising) workers who have lost their jobs last week and this week.
Overall, the markets were relatively happy with the fiscal and monetary policy developments that took place over the past week. However, much of the economic and housing data, which is finally beginning to reflect the severity of the crisis, shows that the economy will face significant challenges over the near term. The key to interpreting the varied, and ever-changing forecasts, is understanding that the duration of the crisis. The economy had strong fundamentals coming into the outbreak, and the recovery could be swift and robust if the virus can be controlled in the next 8-10 weeks, but a prolonged virus with associated stay-at-home policies lasting over a period of several months, then the recovery process will follow a much flatter and longer trajectory.