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Housing Slows with Shelter-in-Place Rules

RFP
New home sales in the month of March came in at a seasonally adjusted annual rate of 627,000; that’s a 15% decline from February and an almost 10% decline from March 2019. All regions of the country saw declines in sales as mandatory stay-at-home orders started to come down in the middle of March. This month’s data is a preview of what is to come for the rest of the quarter. As the historically busy home-buying season is starting, the COVID-19 pandemic threatens people’s health and jobs so purchase decisions will come to a near standstill.

New home sales are a coincident indicator of underlying demand because they are booked at the time of the offer. Existing sales, which also came out this week, are not counted until the contract to buy has closed.

Existing home sales came in at a seasonally adjusted annual rate of 5.27 million in March, an 8.5% decline from February but almost 1% higher than March 2019. A lot of activity occurred at the beginning of the month before most states shut down. While some realtors continued to show homes virtually, many sellers pulled their houses off the market and many buyers canceled contracts when they could not get inspectors in.

Houses that haven’t been pulled off the market are expected to be listed for longer than usual. There are fewer buyers and fewer properties to view as many home showings are canceled or moved online. This is in addition to the downward pressure on demand triggered by mass layoffs. Over five weeks’ time, filings for initial unemployment insurance indicate that we have lost all of the jobs generated in the decade-long recovery from the Great Recession.

Homebuyer sentiment in March as measured by Fannie Mae came in at the lowest reading since December 2016. Buyers are pulling back from large purchase decisions in response to concerns about job security. Sellers are worried they won’t get the price they hoped for before the crisis.

Prices are expected to hold up better than they did in the wake of the housing bust. (It would be hard to do worse.) Inventories remain tight. Existing homes were at a 3.4 month supply, close to a record low and well below the crisis-induced decline in demand. Listings are likely to continue to drop in the weeks to come.

Mortgage applications for the week ended April 17 were flat compared to the previous week; a 2% increase in purchase applications offset a drop in refinancing; that was the first time purchase applications rose in five weeks. Although the COVID-19 disruptions are causing many people to pull back from large purchase decisions, the record low mortgage rates are persuasive for many aspiring buyers, especially millennials.

Corelogic estimates that the bulk of the decline in mortgage applications to buy in March were due to a sharp drop in demand from older borrowers. Millennials pulled back very little, after 25% and 10% increases in January and February, respectively. There is pent-up demand from those who expect to get through the recession and plan to purchase homes in the second half of this year or early 2021.

Bottom Line
This current contraction in the economy is not like 2008. The housing market was healthy before the pandemic occurred. The Federal Reserve is providing ample liquidity for the mortgage market. The Federal Housing Finance Agency (FHFA) recently announced new measures to help nonbank mortgage servicers who have nonperforming loans. We still expect to see the housing market drive the economy out of this recession.

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Karen Nye
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Karen.Nye@us.gt.com

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