Economic Update (June 22, 2020)

[Lloyd Segal]

Economic Update
(Monday, June 22, 2020)

The recession that started in March was the sharpest downturn since the Great Depression. As it turns out, it may also be the shortest. This doesn't mean our economy is fully recovered, or even close; a full recovery is going to take years. But look for more positive numbers from here on out, including this week's reports on retail sales, housing starts, and housing sales, below. This acceleration signals the economy has turned a corner. Plus, the Federal Reserve is prepared to keep monetary policy loose for the foreseeable future. The US has gone through tremendous turmoil so far this year, with a response to COVID-19 that included unprecedented widespread government-mandated economic shutdowns, followed by a combination of powerful protests, riots, and looting. No one knows for sure what the second half will bring, much less 2021 and beyond, but things are looking better. So, let’s look at the details for this week…

Housing starts. U.S. building permits jump 14.4% in May as builders resumed construction work. Housing starts climbed to an annual rate of 974,000 last month from a five-year low of 934,000 in April, the Commerce Department reports. It was the first increase since January. Although the increase was less than expected, a sharp rise in builder permits indicates construction is on track to expand more rapidly. What’s lighting a fire under builders is extremely low mortgage rates. Almost all the increase in new construction involves multifamily units such as apartment buildings and condo complexes. Work on single-family homes — the bulk of the housing market — was flat. As much of the country begins the process of reopening, builders' ability to start new projects remains hampered through a combination of supply-chain disruptions and "social distancing" measures for workers. Case in point, the pace of “New Home Completions” has slowed in each of the past three months, although not as quickly as the drop in housing starts. While construction workers have been classified as "essential workers" in most areas of the country, regulations still require fewer people per crew, dragging out construction times. Of chief importance as we look into the future is that demand for housing remains intact, demonstrated by job openings (demand for workers) in construction remaining shockingly stable throughout the pandemic, while job openings across the broader economy fell off a cliff. In other words, there are still lots of unfilled construction jobs that, if filled, would promote a sharper rebound in new construction. The good news is that May’s building permits exceeded starts by the most since 2004, suggesting pent-up interest from builders in starting more homes. Overall, a strong housing market helps the economy recovery faster. New buyers need to furnish their homes and buy goods and services once they move in, all of which spurs consumer spending and expands our economy.

Existing Home Sales (National). Sales of previously-owned homes slid 9.7% in May as the coronavirus pandemic continued to weigh on the U.S. real estate market. Existing-home sales occurred at a seasonally-adjusted annual pace of 3.91million, the National Association of Realtors reported today. It was the lowest level for existing-home sales since July 2010. Compared with last year, sales were down 26.6% in May. There was a 4.8-month supply of homes for sale in May, down from a 4-month supply in April, meaning inventories are low. Typically, a 6-month supply of homes is considered indicative of a balanced market. Additionally, the median existing-home price last month was $284,600, up 2.3% from May 2019. The pending home sales report reflect real-estate transactions where a contract was signed but the sale had not yet closed, and it is considered to be a barometer for future existing-home sales reports. The existing-home sales report, meanwhile, measures transaction closings. Consequently, the downturn in pending home sales in March and April served as a warning that May’s existing home sales numbers would be down considerably. The report will probably not show significant improvement until June data are reported in July. May’s report aside, most signs point toward a rebound in the housing market following the downturn caused by the coronavirus pandemic. But the downturn in the inventory of homes for sale could prove problematic for buyers.


Home Sales (LA County). The number of homes sold across Southern California plunged 45% in May from a year earlier as the coronavirus outbreak put a freeze on our region’s housing market. These were closed escrows, meaning most buyers placed their offers in April and even March, during the height of stay-at-home orders. Economists say home sales usually decline before prices do in a market downturn because sellers are reluctant to drop their price until they absolutely have to. As the coronavirus outbreak became a heightened concern, many sellers also pulled their homes from the market (fearing infection), further restricting supply and making price drops less likely. Still, some indications of price movement are apparent. The region’s median home price rose 2.7%. Although the region’s median sale price — the point at which half the homes sold for more and half for less — rose again compared with last year, it actually dipped 1.2% from April. Here’s how home sales and prices broke down in May: In Los Angeles County, sales fell 49.5% from a year earlier, while the median sales price rose 1.6% to $620,000. In Ventura County, sales fell 49.4%, while the median price fell 1.7% to $580,000. The direction of the overall economy probably will play a big role in whether home prices soften further. Businesses are reopening and more people are venturing outside as governments lift stay-at-home restrictions. According to Redfin, the number of homes in L.A. County that entered escrow in the four weeks that ended June 7 was 28% higher than the low point at the end of April but still 32% below a year earlier.


San Fernando Valley Home Sales Update. The Southland Regional Association of Realtors reports that sales of single-family residences and condominiums plunged 51% in May, compared to 2019. A total of only 238 units changed hands in May in the San Fernando Valley. Both 51% and 238 units set records, beating the prior historical lows in April. The coming months will also be challenging as pending sales (a measure of future activity) are down 54.3% from a year ago with only 304 homes currently in escrow. SRAR also reports that there were 1,040 active listings in May, representing a 3.4- month supply. It marks the first time in seven months that inventory exceeded the benchmark of 1,000 listings. The median price of homes sold last month was $750,000. The median for condominiums was $447,000. SRAR represents 10,300 Realtors in San Fernando and Santa Clarita Valleys (doesn’t it feel like there are a BILLION Realtors in the Valley?). And don’t poo-poo the Valley. If the San Fernando Valley was incorporated as a city, it would be the second largest city in California (behind only LA) and the fifth largest city in the United States!


Mortgage Rates. Mortgage rates fell to a new all-time low for the fourth time this year. The 30-year fixed-rate mortgage averaged 3.13% for the week ending June 18, down eight basis points from a week earlier, Freddie Mac reports. The previous record low was 3.15% back at the end of May. A year ago, the 30-year home loan averaged 3.84%. The 15-year fixed-rate mortgage dropped four basis points to an average rate of 2.58%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage dipped one basis point to 3.09%. The interest rates on home loans roughly track the direction of long-term bond yields, including the 10-year Treasury note. The 10-year Treasury yield has seesawed over the past week in response to weakness in the stock market (driven by concerns about the sudden rise in coronavirus infections across many parts of our country). This sparked a sell-off in stocks and a flight to the safe haven of bonds, causing bond prices to rise. As the price of bonds increase, their yields decrease. And, as you know, as bond yields decrease, mortgage rates likewise decrease. Eager to lock in cheap financing, buyers have flocked to apply for home loans to purchase property. There’s evidence that the low rates, coupled with pent-up demand (caused by the coronavirus stay-at-home orders), is driving a recovery across the housing market. But with very few homes for sale (i.e. inventory), there’s a rather low ceiling on how high sales activity can go for the foreseeable future.


Purchase Mortgage Applications. The Mortgage Bankers Association (MBA) reports mortgage applications for new home purchases increased 10.9 percent in May compared to a year ago. Compared to April 2020, applications increased by 26 percent. The solid increase in new home purchase applications is another indication of a recovering housing market. Homebuyer traffic is rising, and homebuilders are continuing to ramp up production following the COVID-19 pandemic-related restrictions. MBA expects to see additional strength in the coming months from the resumption of delayed sales activity caused by the social distancing and stay-at-home orders during March and April. MBA estimates new single-family home sales ran at a seasonally adjusted annual rate of 672,000 units in May 2020. The seasonally adjusted estimate for May is an increase of 26.1 percent from the April pace of 533,000 units. On an unadjusted basis, MBA estimates that there were 65,000 new home sales in May 2020, an increase of 27.5 percent from 51,000 new home sales in April.

Weekly Job Claims. Initial jobless claims filed through state unemployment offices fell slightly in the seven days ending June 13, from 1.57 million to 1.5 million, the Labor Department announced on Thursday. It was the 10th weekly decline in a row. However, if people who applied for unemployment benefits through a temporary federal program are included (760,526), new claims totaled a staggering 2.19 million claims in mid-June. New jobless claims have fallen steadily from a peak of 7 million in late March, but the drop off has been much slower than economists had expected. Economists worry a second wave of layoffs is keeping the numbers elevated, posing a potential threat to an economic recovery that’s now in the early stages. Some 49 million new jobless claims have been filed since the pandemic began. But, shocking as those numbers are, they don’t reveal much about how quickly the labor market is recovering. The more important figure to watch is “Continuing Claims,” defined as people who are STILL receiving unemployment benefits. So continuing claims give a better idea of how many people are still out of work. Whereas New Claims only reveals how many people may have lost their jobs in a particular week during the crisis and does not calculate how many people went back to work. As such, continuing claims barely fell to 20.54 million last week. Continuing claims had a peak in the middle of May at nearly 23 million, but are declining at an agonizingly slow pace. And although these claims are subsiding, they are not pointing to a rapid recovery in lost jobs. Unless they fall more quickly in the weeks ahead, our nascent economic recovery could be stunted.

Retail Sales. U.S. retail sales rebounded 17.7% in May as the economy reopened and clawed its way out of the shortest and deepest recession in American history. Sales had tumbled by a record 14.7% in April and 8.2% in March, revised statistics show. The rebound in sales largely reflects the loosening of restrictions on business activity after two months of stay-at-home orders. Along with pent-up consumer demand, federal tax payments to families (i.e. $1,200 stimulus checks), and more generous unemployment benefits also helped stoke higher sales. Yet even after the rebound in May, sales were still 6% lower compared to the same month in 2019, showing the lingering damage caused by the lockdown of the economy. Looking at the details, sales leaped 44% at auto dealers to give a bright gloss to the retail report. (The auto sector typically generates about one-fifth of all retail spending.) Sales leaped 188% at clothing stores, 90% at home-furnishing stores and 88% at stores that sell books, music, sporting goods and other hobby items. Sales also increased 13% at gas stations, showing that Americans got back on the road and visited their favorite realtives. Receipts also increased 29% at bars, which means people are drinking more, which is always a good thing. Still, food-service sales in May were down 40% compared to a year earlier, pointing to an ongoing struggle by thousands of restaurants to survive the current crisis. Many have had to cope with a smaller number of customers due to social distancing requirements, reducing their profits and forcing them to permanently cut staff. Internet retailers, one of the few bright spots during the pandemic, posted a 9% gain in sales. In less than two years, internet retailers surpassed brick and mortar stores for share of consumer spending, and the pandemic – which brought us inside and online – has served to accelerate the shift towards online shopping. The only sector that fared relatively poorly was health and personal care — pharmacies, salons, barbers and so forth. Sales in this sector rose a scant 0.4%.

Splurging While Sheltering in Place. Have stay-at-home orders changed U.S. shopping habits? Possibly. With the increased financial pressure and job insecurity, many consumers have redistributed their spending during the pandemic, and perhaps going forwards. On the basis of observations in previous crisis situations and recent consumer surveys, changes in spending patterns will particularly affect fashion, take-away, travel/holidays, and replacement purchases. For starters, consumers are already planning more road trips this summer (instead of air travel). The hoarding at grocery stores appears to have eased, for now at least. So thank you for buying less toilet paper. Grocery sales rose only 1.3% in sales in May, after a record 14.4% spike in April. Due to the lockdown of businesses in most states, health and personal care — including pharmacies, salons and barbers — ticked up just 0.4%. It remains to be seen whether people will be rushing back to salons, or if they will stick to social-distancing rules. Restaurants revenues are down 40%. But with almost 80% of consumers in surveys expressing a desire to work more from home in the future, people will probably cook more at home, which is further bad news for restaurants. Some people have been more fortunate and have had both the time and money to upgrade their wardrobe, even if it’s just for Zoom conference calls. Is it any wonder sales of shirts continue to outpace pants? For example, sales soared 188% at clothing stores, 90% at home-furnishing stores, and 88% at stores that sell books, music and sporting goods (a significant rebound from April and March). Yet, many others are just trying to stay above water. For example, nearly one-third (30%) of people said they used their $1,200 stimulus checks just to pay bills! Those bills — for cellphones, utilities, cable TV and rent — are the No. 1 priority, even more than essentials. There’s growing concern among these people that the economy won’t restart in time to save them from the Hobson’s choice between paying their rent or mortgage and going hungry. One-third of homeowners have less than $500 — or, worse, nothing — set aside for an emergency, a Harris Poll released this month found.

Challenge to California’s Eviction Ban. Two landlords (represented by Pacific Legal Foundation) filed a lawsuit on June 15 challenging California courts’ refusal to hear eviction proceedings. The lawsuit was filed in response to the California Judicial Council’s declaration that courts would not consider eviction cases for the duration of Gov. Newsom’s state-of-emergency declaration plus 90 days. Filed in Kern County Superior Court, asks that the ban on eviction proceedings be struck down. In the lawsuit, the plaintiffs, who lease their properties at modest rental rates, are now dealing with tenants who refuse to pay rent. Like millions of Americans property owners, landlords have been thrown into financial turmoil by the pandemic and the resulting lockdowns. Many were already operating on thin margins with mortgages, maintenance, and other expenses to pay, and this was before the pandemic and the injunction against evicting non-paying tenants. The lawsuit argues that for landlords to continue to provide affordable housing, they must be allowed to make profitable use of their properties and the eviction process. The lawsuit challenges the right of the judiciary to ignore existing landlord-tenant laws. If successful, overturning the eviction ban would affect all landlords in the state. 

This week. Looking ahead, investors will continue to watch for news about medical advances, vaccines, government stimulus programs, fed monetary actions, and plans for re-opening our economy. Beyond that, New Homes Sales will be released tomorrow (6/23). The core Personal Consumption Expenditures price index (better known as the “PCE index”), the inflation indicator favored by the Fed, will come out on Friday (6/26).

Calendar:
Monday, 6/22: Existing Home Sales
Tuesday, 6/23: New Home sales
Friday, 6/26: Core PCE

Weekly Change:
10-year Treasury: flat 0.00
Dow Jones: rose 600 points
NASDAQ: rose 400 points