The US housing market is seeing two tsunami style forces at once but in opposite directions. The first is the economic impact of the Covid-19 virus pandemic on both wages (down) and unemployment (up). Unfortunately the official statistics released only last week are outright misleading as you can see below.
Real average hourly earnings increased 6.5 percent, seasonally adjusted, from May 2019 to May 2020.
The change in real average hourly earnings combined with an increase of 0.9 percent in the average
workweek resulted in 7.4-percent increase in real average weekly earnings over this period.
We got a better idea to the unemployment state of play on Thursday as we note the scale of the issue.
The advance unadjusted number for persons claiming UI benefits in state programs totaled 18,919,804, a decrease of 178,671 (or -0.9 percent) from the preceding week.
The only hopeful bit is the small decline. Anyway let us advance with our own view is that we will be seeing much higher unemployment in 2020 although hopefully falling and falling real wages.
The Policy Response
The other tsunami is the policy response to the pandemic.
FISCAL STIMULUS (FEDERAL) – The U.S. House of Representatives passed a $2.2 trillion aid package – the largest in history – on March 27 including a $500 billion fund to help hard-hit industries and a comparable amount for direct payments of up to $3,000 to millions of U.S. families.
That was the Reuters summary of the policy response which has been added to in the meantime. In essence it is a response to the job losses and an attempt to resist the fall in wages.
Next comes the US Federal Reserve which has charged in like the US Cavalry. Here are their words from the report made to Congress last week.
Specifically, at two meetings in March, the FOMC lowered the target range for the federal funds rate by a total of 1-1/2 percentage points, bringing it to the current range of 0 to 1/4 percent.
That meant that they have now in this area at least nearly fulfilled the wishes of President Trump. They also pumped up their balance sheet.
The Federal Reserve swiftly took a series of policy actions to address these developments. The FOMC announced it would purchase Treasury securities and agency MBS in the amounts needed to ensure smooth market functioning and the effective transmission of monetary policy to broader financial conditions. The Open Market Desk began offering large-scale overnight and term repurchase agreement operations. The Federal Reserve coordinated with other central banks to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements and announced the establishment of temporary U.S. dollar liquidity arrangements (swap lines) with additional central banks.
Their explanation is below.
Market functioning deteriorated in many markets in late February and much of March, including the critical Treasury and agency MBS markets.
Let me use my updated version of my financial lexicon for these times. Market function deteriorated means prices fell and yields rose and this happening in the area of government and mortgage borrowing made them panic buy in response.
It seems hard to believe now but the US ten-year opened the year at 1.9%, Whereas now after the recent fall driven by the words of Federal Reserve Chair Jerome Powell it is 0.68%. Quite a move and it means that it has been another good year for bond market investors. The thirty-year yield is 1.41% as we note that there has been a large downwards push as we now look at mortgage rates.
Let me hand you over to CNBC from Thursday.
Mortgage rates set new record low, falling below 3%
How many times have I ended up reporting record lows for mortgage rates? Anyway we did get some more detail.
The average rate on the popular 30-year fixed mortgage hit 2.97% Thursday, according to Mortgage News Daily……..For top-tier borrowers, some lenders were quoting as low as 2.75%. Lower-tier borrowers would see higher rates.
CNBC noted some action here too.
Low rates have fueled a sharp and fast recovery in the housing market, especially for homebuilders. Mortgage applications to purchase a home were up 13% annually last week, according to the Mortgage Bankers Association.
According to Realtor.com the party is just getting started although I have helped out with a little emphasis.
Meanwhile, buyers who still have jobs have been descending on the market en masse, enticed by record-low mortgage interest rates. Rates fell below 3%, to hit an all-time low of 2.94% for 30-year fixed-rate loans on Thursday, according to Mortgage News Daily.
Mortgage demand is back on the rise according to them.
For the past three weeks, the number of buyers applying for purchase mortgages rose year over year, according to the Mortgage Bankers Association. Applications shot up 12.7% annually in the week ending June 5. They were also up 15% from the previous week.
Call me suspicious but I thought it best to check the supply figures as well.
Mortgage credit availability decreased in May according to the Mortgage Credit Availability Index (MCAI)………..The MCAI fell by 3.1 percent to 129.3 in May. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit.
So a decline but still a lot higher than when it was set at 100 in 2012. The recent peak at the end of last year was of the order of 185 and was plainly singing along to the Outhere Brothers.
Boom boom boom let me here you say way-ooh (way-ooh)
Me say boom boom boom now everybody say way-ooh (way-ooh)
What about prices?
As the summer home-buying season gets underway, median home prices are surging. They shot up 4.3% year over year as the number of homes for sale continued to dry up in the week ending June 6, according to a recent realtor.com® report. That’s correct: Prices are going up despite this week’s announcement that the U.S. officially entered a recession in February.
As Todd Terry sang.
Something’s goin’ on in your soul
The housing market is seeing some surprises although I counsel caution. As I read the pieces about I note that a 4.3% rise is described as “shot up” whereas this gives a better perspective.
While that’s below the typical 5% to 6% annual price appreciation this time of year, it’s nearly back to what it was before the coronavirus pandemic. Median prices were rising 4.5% in the first two weeks of March before the COVID-19 lockdowns began. Nationally, the median home list price was $330,000 in May, according to the most recent realtor.com data.
But as @mikealfred reports there is demand out there.
Did someone forget to tell residential real estate buyers about the recession? I’m helping my in-laws buy a house in Las Vegas right now. Nearly every house in their price range coming to market sees 40+ showings and 5+ offers in the first few days. Crazy demand.
Of course there is the issue as to at what price?
So there we have it. The Federal Reserve will be happy as it has created a demand to buy property. The catch is that it is like crack and if they are to keep house prices rising they will have to intervene on an ever larger scale. For the moment their policy is also being flattered by house supply being low and I doubt that will last. To me this house price rally feels like trying to levitate over the edge of a cliff.