New residential construction, or housing starts, came in at a seasonally adjusted annual rate of 974,000 in May, a 4.3% increase from April but still well below the 1.3 million level a year ago. Both single and multifamily starts suffered losses when the pandemic and resulting shutdowns began.
May is the first month when housing reversed course. The Northeast and the West have begun to rebuild, but the South and Midwest are still losing ground. The extension of the first wave of the pandemic into these regions and the West will only exacerbate the losses as firms and consumers pull back.
Building permits rose 14.4% in May to an annualized rate of 1.2 million in May; that is almost 9% lower than a year ago. The monthly rise in permits was widespread across regions.
The appetite for lockdowns has waned, but fear of contagion acts as its own tax on the economy. Arizona, Texas and Florida, which are big markets for new home construction, are most at risk with the surge in hospitalizations in those areas. Masks and social distancing are not yet the accepted norm across much of the country, which will cause the pace of infections to strain hospitals and take a larger toll than elsewhere in the world.
Home builder sentiment measured by the National Association of Home Builders (NAHB), returned to expansionary territory in June after collapsing in April and May. Two of the three components of the index led the charge into positive territory, but a third component, prospective buyer traffic, remains in contractionary territory. The Northeast is the only region that remains in contractionary territory. As it recovers, we could see positive sentiment in the summer months but the first wave of the virus hitting the South and West could deflate confidence among builders.
Mortgage rates have remained low during the pandemic. Recent economic news, including the stronger-than-expected May employment report, pushed mortgage rates slightly higher as the 30-year mortgage rate tends to follow the 10-year Treasury yield. The Federal Reserve’s commitment to buying $40 billion in mortgage-backed securities per month, helps provide liquidity to the mortgage market and will keep rates from spiking significantly.
Due to the attractively low rates, mortgage applications for purchase rose 3.5% last week on the highest volume since 2009. Refinancing applications rose 10.3%, 106% higher than a year ago. Baby boomers pulled back when the pandemic began, causing refinancing applications to shrink, but government stimulus and increased confidence have brought them back.
Mortgages in forbearance spiked when the CARES Act allowed homeowners to skip payments for up to a year without proof of hardship. The number edged lower to 4.6 million from a high in late May.
The boom in mortgage demand can be attributed to those less impacted by the pandemic and shutdowns; some have extra money from either stimulus checks or saving. While motivated to take advantage of extra-low mortgage rates, buying interest could fade when white-collar layoffs pick up over the summer as the effects of COVID-19 work their way through the economy.
Mortgage applications surged in late May and early June, which should help to buoy the housing market in the short term. Inventories remain extremely tight, which is supporting home prices. The euphoria could be short-lived if we can’t better contain the spread of the virus before the second wave hits with the onset of flu season this fall. We can’t lose sight of the fact that this is a health crisis with significant downside risks for the economy.
Copyright © 2020 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.