Investors continue to grapple with the fallout from the coronavirus outbreak. Wall Street's three major indexes — the S&P 500 index, Dow Jones industrial average and Nasdaq composite — dropped 4.4% each on Apr 1 after the White House said that 100,000 to 240,000 Americans could die of COVID-19 even if the country follows guidelines to avoid shopping trips, eating out and other activities through April.
Even sectors generally considered safer bets owing to their high dividend payouts registered a plunge. Real estate and utilities each dropped 6%, making them the leading percentage losers among the S&P 500's 11 major sectors. Notably, the S&P 500 declined 20% during the March quarter — marking the worst quarter since 2008.
So, how will the U.S. housing market fare during the spring selling season — March through June — when the lowest mortgage rates on record are colliding with the prospect of a coronavirus outbreak-induced economic downturn?
Let’s take a look at the current economic backdrop that will likely have a bearing on the key spring home-buying season.
Luxurious Housing Markets Face the Wrath
Housing fundamentals in the United States were exceptionally strong through February before the crisis began. The picture has altered drastically since. Most expensive housing markets in the country like New York, Seattle, San Francisco and Los Angeles — which have already been grappling with a tight inventory situation — are experiencing tough times due to the pandemic.
Some cities/states are limiting new home construction on a temporary basis, which is enough reason to make builders cautious. Meanwhile, although most cities/states are treating new home construction as an "essential" activity by not slowing down, potential homebuyers are backing off as the coronavirus scare tightens grip.
Refinancing Got A Boost to Save More
It is evident from the latest Weekly Mortgage Applications Survey of the Mortgage Bankers Association (MBA) that most borrowers are refinancing to save money on monthly payments and potential homebuyers are backtracking fast. The Purchase Index — which tracks mortgage applications for only single-family homes — was down 11% for the week ending Mar 27 over the previous week and 24% from a year ago. Precisely, the effects of the pandemic on housing is pronounced but the market has been hit the hardest in New York, California, and Washington state, where purchase applications are down more than 30% for the week on a year-over-year basis.
Meanwhile, owing to the surge in refinancing activities, total mortgage application volume grew 15.3% last week compared with the previous week, per the MBA’s seasonally adjusted index. Joel Kan, associate vice president of economic and industry forecasting at MBA stated, "Mortgage rates and applications continue to experience significant volatility from the economic and financial market uncertainty caused by the coronavirus crisis. After two weeks of sizable increases, mortgage rates dropped back to the lowest level in MBA's survey, which in turn led to a 25% jump in refinance applications."
MBA's Refinance Index, which tracks just mortgage refinancing, grew 26% last week from the previous week and was up 168% from a year ago. Notably, refinance share of mortgage activity represented 75.9% of total applications, up from 69.3% in the previous week.
High Jobless Claims & Dreary Economic Views
The latest report depicts that weekly jobless claims spiked to 3.3 million for the week ending Mar 21, a staggering all-time high, as coronavirus layoffs began to hit the job market. Last week saw the biggest jump in new jobless claims in history, surpassing the record of 695,000 set in 1982. Many economists are of the opinion that this is the just the beginning of a massive spike in unemployment that could result in more than 40 million Americans losing their jobs by April. Notably, the new weekly report is slated to release today.
Meanwhile, economists are projecting two subsequent quarters of U.S. GDP decline due to the rapidly evolving COVID-19 pandemic. According to an estimate by Wells Fargo economists, real GDP in the United States will probably nosedive at an annualized rate of nearly 15% in Q2, which would be the sharpest rate of decline in the 73-year history of quarterly GDP data. Adding to it, the report states that Q3 will likely see a 6.3% contraction. The picture is expected to become rosier in Q4 with 4.1% expansion, according to the estimate.
Goldman Sachs now expects Q2 economic decline to be deeper than previously projected and unemployment to scale higher, citing anecdotal evidence and "sky-high jobless claims numbers." Goldman said it is now forecasting a real GDP quarter-over-quarter decline of 34% annualized for Q2. It also sees the unemployment rate rising to 15% by mid-year.
Joel Kan is also apprehensive owing to the bleaker economic outlook as well as the glaring latest weekly unemployment claims numbers. "Buyer and seller traffic – and ultimately home purchases – will also likely be slowed this spring by the restrictions ordered in several states on in-person activities," said Kan.
Again, chief economist of the National Association of Realtors, Lawrence Yun, believes that the peak of the housing market’s annual cycle is expected to be delayed, not canceled.
The coronavirus, in the meanwhile, continues to ravage the stock market, wiping out considerable equity for households. This with an imminent recession and layoffs is anticipated to dent the housing market in the near term which includes notable names like Lennar (LEN - Free Report) , D.R. Horton (DHI - Free Report) , PulteGroup (PHM - Free Report) , KB Home (KBH - Free Report) , Meritage Homes Corporation (MTH - Free Report) , TRI Pointe Group, Inc. (TPH - Free Report) , Century Communities, Inc. (CCS - Free Report) and M.D.C. Holdings, Inc. (MDC - Free Report) . Among these, TRI Pointe Group and Century Communities currently sport a Zacks Rank #1 (Strong Buy), while Meritage Homes and M.D.C. Holdings carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
5 Stocks Set to Double
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