Economic Update – Week of July 26, 2020

Existing Home Sales.  Sales of existing homes jumped 20.7% in June compared with May, according to the eternally optimistic National Association of Realtors.  It was the largest monthly gain since the NAR began tracking the data and came after sharp declines over the previous three months due to the coronavirus pandemic.  Sales were still 11.3% lower annually.  However, this is based on closings, so it represents contracts signed in late April and May, before reopening of the economy (and before the most recent surge in coronavirus cases).  The data shows a trend for buyers desiring homes in smaller towns and suburbs.  The urban areas, with higher density, are obviously not as exciting during this pandemic, but home sales could have been more robust had there been more inventory.  The supply of existing homes fell a remarkable 18.2% annually to just 1.57 million homes at the end of June.  Based on the current sales pace, that represents only a four-month supply.  The United States is facing an acute inventory shortage, especially at lower price points.  The inventory levels are shrinking and shrinking, which could create a bottleneck lowering home sales later.  Mortgage rates are hovering near record lows and have been for several weeks. This also give buyers more purchasing power but also keeps home prices elevated.  The median price of an existing home in the U.S. sold in June rose 3.5% annually to $295,300.  Not much by LA standards, but the highest price on record.   Most of these gains are likely from pent-up spring demand, but there are signs that it will continue at least through the summer.  However, there could be trouble on the horizon; a second lockdown, as coronavirus cases are surging in many parts of the country.

National Associations of Realtors – Existing Home Sales

New Home Sales. Existing home sales represent 90% of the real estate sales market.  New home sales represent the other 10%.  Nevertheless, monitoring new home sales is important because it is a leading indicator of the economy and the condition of our real estate market. As such, June was a very good month as new single-family home sales increased by 13.8% from May to 776,000 annual rate.  Sales are up 6.9% from a year ago.  The recovery in new home sales continued at an incredible paace in June, rising to the highest level since 2007.  New home sales were higher in June than before COVID-19 hit the US economy.  Keep in mind that sales of new homes are counted when the contracts are signed, so they represent a timelier indicator of activity than existing home sales (which are not counted until closing).  There are also a couple of factors that should continue to drive new home sales higher in the months ahead.  First, affordability is increasing; Fed rate now sit below 3% for the first time on record.  Second, due to the pandemic, buyers’ preferences are shifting away from denser urban environments, toward the more spacious options in the suburbs where most new single-family homes are built.  However, a lack of finished new homes could be a headwind for sales going forward.  The months’ supply of new homes (how long it would take to sell all the homes in inventory) fell to 4.7 months in June from 5.5 months in May.  The decline was due to both the faster pace of sales and a decrease in inventories (4,000 units).  Given the downward pressure that social distancing regulations, shortages of labor, and supply chain issues continue to exert on new construction, do not expect an oversupply of homes anytime soon.  As a result, home prices should continue to increase in the next several months.

Mortgage Rates.  The average rate on the popular 30-year fixed loan just fell to another record low of 2.87%.  That is about a full percentage point lower than where it was one year ago.  If there is an upside to all the pandemic-induced uncertainty in our economy, it’s these rock-bottom mortgage rates.  And that’s just the average.  Some borrowers are getting even lower rates!  There are pools of loans being sold right now with average rates of 2.625%, meaning some people are getting rates at 2.375-2.5%.  While those likely involve some closing costs, that’s still nuts!  As you know, mortgage rates loosely follow the yield on the 10-year U.S. Treasury, which last week fell to the lowest level since March (0.59%).  It is not an exact marriage, however, as the two have diverged recently given all the crazy market conditions brought on by the coronavirus.  For example, the Federal Reserve began buying more mortgage-backed bonds to keep the market afloat and at the same time instituted a mortgage bailout for borrowers hit financially by the crisis.  But all this uncertainty makes lenders (and investors in mortgages) nervous.  They worry that people will lose their jobs and not make their monthly payments, or that the economy will go on lockdown again, crippling the housing market in general.  Mortgage rates are really based on what investors will pay for mortgage-backed bonds.  Investors need some kind of yield, or they won’t buy those bonds.  That is why rates can only go so low.  It’s a question of whether the bonds even exist and what the demand would be for those incredibly low-rate bonds?  So yes, mortgage rates are at a record low and could move even lower, especially if the U.S. economy shuts down again, unemployment rises, and investors rush even further into the bond market.  But the disastrous economic conditions needed for that to occur would likely scare potential buyers away from buying homes.

Weekly Mortgage Demand. Mortgage applications to purchase a home rose 2% for the week and were a striking 19% higher than a year ago.  That is the ninth straight week of annual gains and wider than in previous weeks.  Add that to an already strong refinance market, and total mortgage application volume rose 4.1% last week from the previous week, according to the Mortgage Bankers Association.  Borrowers today are looking for any potential savings, given the uncertainty in our economy due to the pandemic.  Low rates are only adding to already strong buyer demand.

ATTOM Data Solutions First-Half U.S. Foreclosure Activity By Year


Foreclosures. ATTOM Data Solutions released its “Midyear 2020 U.S. Foreclosure Market Report” which shows there were a total of 165,530 properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) in the first six months of 2020, down 44 percent from the same time period a year ago and down 54 percent from the same time period two years ago.  This is good news for distressed homeowners, but bad news for real estate investors.  In June of 2020, only one in every 14,798 properties in the United States had a foreclosure filing, the lowest in years.  Why?  Because residential foreclosures across the nation continue to decline amid a unique combination of a booming housing market and now a moratorium on foreclosures while the country struggles to overcome the crisis.  Foreclosure starts and completions were already declining rapidly last year because the housing market and the economy were riding so high.  Now they’re down to historic lows not seen for over 15 years as the federal government bans lenders from pursuing foreclosures (to help people weather the pandemic). ​ However, distressed property volume is almost guaranteed to ​increase significantly once the moratorium is lifted because millions of Americans ​missed their mortgage payments ​in June and will continue to do so because of unemployment.  But for now, everything is on hold and the foreclosure numbers reflect that pause.  Nationwide only 0.12 percent of all housing units (one in every 824) had a foreclosure filing in the first half of 2020.  Metro areas with the highest foreclosure rates include the only city in California, Bakersfield (0.27 percent).  States that saw an annual decrease include California (down 29 percent).  There were a total of 30,656 U.S. properties with foreclosure filings in Q2 2020, down 80 percent from the previous quarter as well as a year ago to lowest quarterly total since 2006 (pre-recession average of 278,912 per quarter), making Q2 2020 the 15th consecutive quarter with foreclosure activity below pre-recession averages.

Weekly Jobless Claims. Unfortunately, the 15 consecutive weeks of declines in U.S. initial jobless claims are over.  As the coronavirus spreads across our nation, some 1.4 million Americans applied for unemployment benefits last week, the Labor Dept. reports.  It’s an increase from the prior week, when 1.3 million applied.  Another 975,000 people requested Pandemic Unemployment Assistance, a new federal program for self-employed and gig workers.  That figure increased by 20,000 from the previous week.  This marks the 17th week in a row that total jobless claims have been above 2 million.  Claims for regular unemployment had been dropping since the last week of March, when they peaked a 6.6 million, until this past week’s increase to 1.4 million from 1.3 million.  The biggest jumps in unemployment applications were in Florida, Georgia, Washington, Indiana, and our very own California; the very same states that have seen sharp increases in the number of COVID-19 cases.  Further, the risk from repeated business closures is that temporary job losses will become permanent.  This could result in an even slower pace of recovery.  To put this data in perspective, before the pandemic surge, the highest single weekly tally ever was 695,000 in 1982.  Now, more than four months into the crisis, initial claims are still running at an astonishing 1.4 million per week.


Eviction Moratoriums.  Los Angeles is not the only city with an eviction moratorium.  Several major cities across the U.S. (and our federal government) have either issued temporary bans on evictions or are considering them as the coronavirus outbreak unfolds.  The San Jose City Council approved a proposal preventing evictions amid the coronavirus emergency, and San Francisco are putting forward similar legislation.  In other cities, mayors have declared states of emergency that bar evictions from moving forward , such as in Miami and in Baltimore.  Boston Mayor Martin Walsh asked the Massachusetts court system “to offer leniency to those facing non-essential evictions” as consumer advocates called for a ban on the practice during the infectious disease pandemic.  In Washington State, which has one of the largest coronavirus clusters in the country, two major landlord groups, the Rental Housing Association of Washington and the Washington Multi-Family Housing Association, both recommend a 30-day moratorium on evictions in King County, where Seattle is located.  In New York, the city’s courts have implemented a temporary moratorium on evictions.  Additionally, the Real Estate Board of New York, a trade group that represents major developers and property managers in the city, voluntarily placed a three-month moratorium on evictions.  Philadelphia’s mayor is encouraging landlords to recognize the extraordinary circumstances tenants are facing by not adding housing insecurity to a family’s financial or health challenges.  Major trade groups representing the rental industry have also backed landlords taking steps to reduce the burden on renters, at least temporarily.  But even in cities that haven’t halted them, evictions may not proceed normally because courts in many municipalities have either closed or scaled back operations during the outbreak.  Avoiding evictions at a time when millions of people could lose income is also a matter of public health.  This pandemic is a stark reminder that housing is health care.

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