August 13, 2021

Consumer sentiment plunged in early August and now sits at its lowest level since 2011 amid concerns and frustrations about the Delta variant. Opinions about home buying also took a step back and reached  a new record-low in July. Mortgage rates are likely to reverse because of the sentiment report, which may continue to help first-time buyers who have recently begun to show increased signs of activity.

Consumer sentiment takes a big step backward in early August

• The University of Michigan’s Index of Consumer Sentiment fell to 70.2, down 11 points (13.5%) from July.
• Sentiment is now below where it was in April 2020, at the beginning of the pandemic.

Mortgage rates had been on the rise, but are set to decline following the sentiment report

• Investors appear to view the sharp decline in sentiment as a sign that the Delta variant could limit economic activity more than previously thought.
• Expectations for GDP growth remain strong, but forecasters cite significant downside risks.

Mortgage applications register a win this week, thanks to increased applications for government loans

• Applications for home purchase loans increased 1.8% in the week ending August 6th from the week prior.
• Applications for FHA loans – which tend to be an attractive option for many first-time buyers – increased 3.3% on the week.

So what? 

While the surge in COVID-19 cases prompted by the Delta variant hasn’t yet affected consumer activity in a meaningful way, the recent outbreaks across the country have appeared to wear on consumer confidence and outlook for the coming months. The University of Michigan’s Index of Consumer Sentiment fell sharply in August from July to reach its lowest level since 2011. Dubbed a “stunning loss of confidence” by the survey’s managers, the 13.5% decline in the index was the series’ third-largest monthly downtick since 1980. According to the report, the previous one month declines in this metric are all connected to sudden negative changes in the economy. But despite the dire precedent, the survey also suggested that a few factors could allow a swift return of consumer optimism, including control over the Delta variant and the fact that the macroeconomy had been trending upward before the new variant began to spread across the country in earnest. Subindices of the University of Michigan survey also pointed to the fact that consumers continue to think it’s a bad time to buy a home, a finding that was echoed in Fannie Mae’s July National Housing Survey. Just over a quarter (28%) of respondents to the latter report said that July was a good time to buy a home – the lowest ever share and down 4 percentage points from June. Demand for housing remains high and homes continue to sell at a very fast rate, but the latest read on consumer sentiment showed that rising prices, limited inventory and, indeed, the Delta variant all appear to be weighing on consumers’ confidence.

Following last week’s release of July jobs data, mortgage rates had been trending upward after touching six-month lows. But the surprisingly abrupt downshift in consumer confidence prompted a sharp retreat in bond yields, and mortgage rates are likely to follow suit in the coming days. While it’s always important to differentiate between sentiment and actual activity, in the eyes of investors, the poor consumer sentiment reading indicated that the latest wave of COVID-19 cases could limit the economy more than had been previously thought. In fact, while it was the latest, and perhaps loudest indication of the economic recovery not living up to its lofty projections set earlier in the year, forecasters have started to take a more cautious tone when considering the economy’s path forward. In its predictions for third quarter GDP figures this week, Bank of America was sure to call out that there was significant downside risk to their (admittedly strong) forecasts. The downshift in outlook may also weaken the case for the Federal Reserve to tighten monetary policy before the end of this year – a scenario that was looking increasingly likely over the last couple weeks – although still-high inflation figures may still force the Fed into making a change.

Applications for home purchase mortgages – a leading indicator for home sales – have steadily fallen since March. And while the metric continues to struggle to gain traction, recent dynamics in the measure are offering some solace to a subset of the market that has had a difficult time capitalizing on the recent housing boom. The MBA’s weekly mortgage applications index increased by 1.8% in the week ending August 6 from the previous week – the first weekly gain in the series in a month. The improvement is good news on its own, but it’s made even better by the fact that it was driven by a weekly increase in applications for government loans. Government mortgages – those managed by the Federal Housing Administration, the U.S. Department of Agriculture or the Department of Veterans’ Affairs – typically have less stringent down payment and credit score requirements, and are therefore often a preferred option for first-time home buyers. While the pandemic has prompted many people who were considering taking the next step from renting to buying, the recent acceleration in home price growth has prevented some people from being able to do so. The weekly increase in government home purchase loan applications, including a 3.3% increase in FHA loan applications, suggests that market conditions may slowly be shifting in favor of first-time buyers – something that could help usher in a new wave of homebuying should it continue to materialize.

Click here to read past editions of Zillow’s Market Pulse updates.