June 22, 2020
Home sales continued to slide in May, but the data likely don't reflect more-recent increases in homebuyer activity. Participation in mortgage forbearance programs fell slightly, but remains elevated. And economic activity rose at a record rate as the country reopened.
Home sales fell in May, but better days should be coming soon
- Existing home sales fell 9.7% in May from April, according to the National Association of Realtors.
- The median sale price of an existing home in May was 2.3% higher than a year before, the slowest annual increase since 2012.
Mortgage forbearance program participation fell, but overall delinquency is up
- The share of loans in forbearance as of June 14 fell from the previous week, according to the Mortgage Bankers Association.
- The national mortgage delinquency rate jumped by more than 20% in May from April, according to Black Knight.
A key economic index increased at a record rate
- The Federal Reserve Bank of Chicago's National Activity Index increased to 2.61 in May, a record high, up from a record low of -17.89 in April.
- The broad-based index suggests that economic growth rose significantly in the last month, largely thanks to businesses reopening.
After falling precipitously at the beginning of the pandemic, the housing market has shown marked signs of improvement in recent weeks - though those gains have yet to show up in home sales. Sales of existing homes are captured when the deal closes not when the contract is signed, capturing buyer behavior from one or even two months prior to the month noted in the official release. That means today's reading is measuring activity from a time when most businesses were still shuttered and people were just coming to terms with how their lives would be altered by pandemic. But despite the sharp decline from an already sobering April release, the outlook for the housing market appears relatively rosy heading into the summer months. Pending sales are primed to pick up as low mortgage rates, a gradually opening economy and innovative techniques being employed by real estate professionals keep buyers engaged and eager to enter the market. The small monthly decline in prices is notable and worth watching going forward - prices have never fallen in May from April in the history of the series. Low inventory had been keeping upward pressure on prices, but it now seems buyers may be finding more room to negotiate and/or that more-expensive homes are lingering longer on the market. But nevertheless, look for home sales to begin their recovery beginning in next month's release.
While the participation rate in mortgage forbearance programs is improving, the market remains vulnerable over the long-term. For the first time since the onset of the crisis, the Mortgage Bankers Association's estimate of the share of mortgages in forbearance actually dropped in the week ending June 14 – falling by about 100,000 loans from the week before. Even so, more than 4 million loans remain in forbearance, a figure that helped push the national mortgage delinquency rate as measured by Black Knight up more than 20% in May from April to its highest level in more than 8 years. The numbers in the Black Knight report are a little misleading (not all of the loans in forbearance are truly delinquent, despite the fact that's how they're labeled). But the sheer volume of loans receiving assistance suggests that a huge number of homeowners remain in need of some form of assistance and are likely in a vulnerable financial position. The upcoming expiration of enhanced jobless benefits, as well as recent increases in COVID case volume, help make consumers' financial outlook — and its impact on the broader mortgage market — even more uncertain.
Despite the uncertainty, the economy is slowly but surely coming back to life: The Chicago Fed's national activity index rose to a record high in May, increasing substantially from a record low in April. The broad-based index offers a good gauge for the overall economy's health and performance in a month, and offers an indication of which sectors are thriving and which aren't — and of the 85 indicators tracked, 72 improved in May from April. Still, it's difficult to get too excited about the May uptick this time around. The fact that economic growth has resumed is definitely good news, but the record reading is more a reflection of the fact that the economy has merely resumed activity, rather than operating at anything close to full capacity. What's more, the release doesn't really contain any additional information about what economic activity is going to look like in the coming months, after the initial reopening phase ends. The release also confirmed that the economy was indeed in a recession beginning in March. Still, despite the limited outlook, the report's main takeaway is that large parts of the economy have resumed activity, and that can only be viewed as good news.
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