May 18, 2020
Homebuilder confidence shows faint signs of life. Delinquency rates on consumer loans were rising even before the crisis. And people have begun to tap into their retirement savings in order to meet obligations and buy essential items.
Homebuilder confidence takes a small step back
- The National Association of Home Builders Housing Market Index rose 7 points in May from April, to 37.
- Any level below 50 suggests more builders view market conditions as bad than good.
Delinquency rates on consumer debt were rising heading into the crisis
- The share of consumer loans that were behind by two months (or more) rose steadily in the last few years, according to the Federal Reserve.
- Late payment rates on credit cards and auto loans rose sharply, while mortgage delinquency fell.
People have begun to tap into retirement accounts to make ends meet
- 30% of people with a retirement savings account have withdrawn funds from the account in the last two months.
- 47% of savers have either reduced or stopped contributing to their retirement account over that same timespan.
After plunging in April, confidence among homebuilders appears to have begun clawing its way back. The 7-point increase from April to May in a key measure of homebuilder sentiment was better than most expectations, and a positive step forward for the housing market. Builders' optimism was likely boosted by the fact that many states classified home construction as an essential business – a decision that kept many builders employed and projects underway – and by the fact that mortgage interest rates have sunk to near all-time lows, helping to maintain demand from buyers. That said, despite the monthly increase, builder confidence remains subdued and well below 50, indicating more builders feel conditions are bad than good. In addition to overall market uncertainty, constraints including tight lending conditions and limited material availability will hold back building activity in the near future. But in an economy hungry for good news, today's better-than-expected uptick in builder optimism is welcome and more evidence that the housing market is holding relatively even in tough times.
A recent report from the Federal Reserve Bank of St. Louis sheds some doubt on the more-or-less accepted narrative that household balance sheets were in decent shape headed into the crisis. Delinquency rates on U.S. consumer debt steadily rose in the last three years, to 7.2% of loans delinquent in March 2020 from just under 6.5% March 2017, propelled by disproportionately large increases in credit card and auto loan tardiness. Just 1.6% of mortgages were delinquent as of March, compared to about 6% of credit cards and 14% of auto loans. This discrepancy suggests that wealthier consumers, such as homeowners, were in a more financially sound situation prior to the coronavirus outbreak, while less-affluent consumers were already struggling to meet obligations prior to the pandemic. According to Federal Reserve Chair Jerome Powell, almost 40% of people who had a job in February and live in a household earning a combined $40,000 a year or less lost their job in March — a staggering statistic. Thus far, evidence suggests that federal policy responses are helping keep delinquency rates from spiking. Research from Goldman Sachs suggests that delinquency on consumer loans increased only slightly in April, but that this rate could rise later in the year with the expiration of unemployment insurance.
Increased rates of delinquency and risk of default will also result in less spending and less saving. A recent study from personal finance site MagnifyMoney found that more than a fifth of households (21%) have reduced contributions to their retirement plans since the coronavirus outbreak, while 26% of households have completely stopped saving. What's more, almost a third of Americans have withdrawn funds from an investment account other than retirement savings over the last 60 days. Of the people who have withdrawn funds from an investment account, more than half of them (52%) said they did so to cover necessary expenses like groceries. These actions aren't limited to households on the lower end of the economic spectrum either: Of those households with six-figure (or more) incomes, 37% said they have taken money out from retirement funds over the last 60 days. Part of this uptick is likely due to a provision in the CARES act eliminating the early withdrawal penalty for coronavirus-related withdrawals up to $100,000 from qualified retirement plans and IRAs. But the overall rate of withdrawals remains concerning, and highlights the dire financial state that many people currently find themselves in.
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