Early Data Point to U.S. Housing Slowdown in Coming Weeks

In these first few weeks since the U.S. coronavirus began in earnest, there has been a relative lack of hard, timely data reflecting the most recent changes in the housing market. Initial signals suggest housing was on relatively solid footing in the immediate pre-crisis period – but the strength of that foundation is being severely tested.

Below is a roundup of key trends and informal data illustrating how the mortgage and home purchase markets are responding to early changes in consumer and market behavior; moves taken and proposed by both state/local and the federal government to protect consumers; and how the home building industry is faring so far.

The mortgage market has undergone some violent swings and is showing signs of dysfunction

• In the first few days of the U.S. outbreak, mortgage rates fell to all-time lows, prompting a boom in refinancing and a modest uptick in purchase applications.
• But over the past few weeks, rates reversed and jumped up (up a full percentage point over a two week span), in part due to a surge in demand but also seemingly in response to some emerging fissures in financial markets.
• Volatility in Treasury markets suggests that liquidity problems exist and are widespread throughout markets, despite aggressive Fed intervention aimed at easing these strains.
  • This has weakened demand for bonds (including mortgage-backed securities, which significantly inform mortgage rates themselves); weaker demand means lower prices, which means that investors require a higher yield if they are going to invest.
  • Treasury yields and mortgage rates usually move in tandem, but recently that relationship has wavered. Treasury yields remain quite low, but over the past couple weeks, mortgage rates have fluctuated between their highest levels in months and lowest levels in years.

Home sales were solid in January and February, but are likely to see a big hit in the coming months

• A couple keys factors are contributing to this likely downturn:
  •  Social distancing and mandatory “Stay-at-Home” policies, including in very large markets (CA, NY), increasingly are making it very difficult/impossible to tour and show homes in a traditional way.
  • Growing economic and employment uncertainty will lead people to shy away from big-ticket purchases, especially homes
    • Official reads on consumer sentiment are, thus far, holding up okay. But more-informal, daily indicators show a steep decline and sentiment levels at two year lows.
    • Claims for unemployment benefits have already increased significantly (up 33% nationwide last week) and state-level data suggest a meteoric rise coming this week.
• Already, traditional real estate showings have come down significantly in most parts of the country
• China might offer some hints at what’s to come:
  • Home sales fell sharply in China in the immediate aftermath of measures taken to stop CV spread. Recently, Chinese real estate sales show signs of a slow recovery: They’re still down 60% YoY, but that’s a big improvement from down 100% YoY in prior weeks
  • Other signals of consumer activity/confidence in China are showing signs of coming back to life, but are still well down from last year.

HUD, FHFA and Fannie Mae/Freddie Mac agreed to a 60-day suspension of foreclosures for mortgages they insure/guarantee

• Fannie Mae and Freddie Mac guarantee roughly half of U.S. mortgages
• Fannie and Freddie also announced plans to offer mortgage forbearance (the reduction or suspension of monthly payments) for up to 12 months
• About 8 million single-family loans nationwide are insured by the FHA
• The foreclosure moratorium immediately affects about 182,000 homeowners nationwide who are in some stage of the foreclosure process
• The policy also offers other forms of relief, including waiving penalties and/or late fees and reporting delinquencies to credit bureaus
• Fannie and Freddie were also recently directed to explore appraisal methods that do not require an in-person inspection of the interior of homes, and to pursue alternate methods of income and employment verification for potential borrowers.
• Bank of America announced this past Thursday morning that some customers can request to defer mortgage payments, and that they will pause foreclosure sales, evictions and repossessions

Most housing policy is decided locally. States and cities are also enacting local protections, especially for renters and/or lower-income residents

• States including Washington, California and New York -- and cities including Los Angeles, Miami, Orlando, Seattle, and Philadelphia – have enacted a range of housing security strategies including eviction moratoriums.
  •  A major goal of these strategies is to avoid exacerbating the public health crisis posed by Covid-19 by pushing more people into homelessness.
• Beyond direct housing assistance, dozens of U.S. cities are also taking measures to prevent shutoffs and/or restore access to basic utilities like water service
• It’s possible that some municipalities may soon expand these protections to commercial property as well (Seattle city council members recently debated this), in hopes of insulating small business tenants from the shock of having to pay rent without any revenue coming in.
  •  These protections would potentially allow more businesses to stay afloat and keep jobs open for employees to return to on the other side of the crisis.

Home building data is strong, but mostly represents pre-outbreak sentiment and activity

• The National Association of Home Builders (NAHB) Housing Market Index – a monthly measure of builder sentiment – remains near all-time highs but also suggests growing concern among builders (most of whom were surveyed before March 4^th) surrounding the coronavirus’s impact on future home sales.
• Home starts in February exceeded industry expectations, and could indicate that builders were in a bit of a rush to get some projects off the ground before the coronavirus “storm” hit.