New home sales, which record a sale at the contract signing, came in at an annualized rate of 676,000 in May. That’s an increase of 16.6% from April and 12.7% from May 2019. April sales were revised down by 43,000, meaning sales fell for three months in a row, with buyers pulling back before the lockdowns began. Inventory fell below six months’ supply, the amount needed for the market to clear.
Existing home sales fell almost 10% in May from April, and almost 27% from a year ago. That is the largest annual drop since February 2008 but reflects limited activity during the lockdown period.
While buyers pulled back from the existing home market, so did sellers. Inventory remains at a tight level of just under five months’ supply. More than half of the existing homes were on the market for less than a month in May. Pending home sales, an indicator of signed contracts, fell nearly 22% in April from March, another double-digit drop.
Mortgage applications picked up in late May and early June, suggesting a jump in existing sales in July and August; there is usually a two month lag between applying and closing on an existing home.
Overall, inventories are expected to remain tight. Fannie Mae’s Home Purchase Sentiment Index for May shows that only 32% of homeowners believe this is a good time to sell a home, while 52% believe it is a good time to buy. Prices favor sellers as they continue to rise on supply constraints. The West and Northeast list the highest prices, with the West median price coming in at $408,400 and the Northeast at $327,900. The national median price in May was $284,600.
Mortgage forbearances permitted by the CARES Act have been widely accepted; there are 4.6 million homeowners in forbearance in June. While this figure represents almost 9% of all mortgages, it is down from a peak in late May and has been falling for three straight weeks as concern about a prolonged shutdown abated.
Delinquent mortgages not backed by government agencies are also rising but represent a much smaller portion of the total. Those defaults are more likely to include self-employed owners who have been hit hard by the lockdowns.
Stimulus checks and extensions to unemployment insurance took a long time to hit the checking accounts of many households. Distressed sales remain at 3% of total sales, the same as last month.
The housing market has held on relatively well during this service sector recession as would-be buyers have taken advantage of incredibly low mortgage rates, despite only viewing the homes online in many cases. Unfortunately, we are still experiencing the first wave of the pandemic in the Southern and Western regions of the country with no lockdowns in sight. From previous experience, we have seen that it does make a difference to shut down almost all activity.
The recent surge in COVID-19 cases is not expected to result in widespread lockdowns but will put a damper on activity during the summer. The housing market could heat up in the autumn but if the pace of infections continues to grow, the biggest housing market in the country, the South, could suffer significant losses and exacerbate the downturn in GDP in 2020.
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.