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Since we released our annual Forecast Notes presentation three weeks ago, the world has continued to change rapidly and in unprecedented ways.
The U.S. now has more COVID-19 cases than any other country in the world and the growth rate has yet to show any signs of moderating (as seen in the list to the right and the chart below from the Johns Hopkins Coronavirus Research Center). Meanwhile, the Federal Reserve, Congress and the Trump administration have combined to implement multiple fiscal and monetary policy emergency measures designed to bolster the economy and financial markets in response to their rapid deterioration.
The economic impact is already severe and destined to worsen. With business shutdowns and work stoppages, a significant part of the economy has slowed down or ground to a halt. As shown in the graph below, initial claims for unemployment insurance spiked up to a staggering 6.65 million in the week ending March 28. (This is 10 times higher than the previous all-time high from 1982.) States won’t even be able to process these claims in anything resembling a timely fashion.
What about the housing and mortgage markets? Speculation is running far ahead of actual data at this point, but home sales will take a huge hit. In her March 30 post on the latest home sales data, Diana Olick of CNBC quoted one estimate from Capital Economics saying they expected home sales to fall by 35% for the spring season.1 We believe it’ll be considerably worse. Pending sales are already falling out of escrow as prospective buyers lose their jobs. Other buyers have stopped their home searches as they wait for things to calm down. And sellers are delisting because they don’t want to sell in a down market, much less have a bunch of potentially infected strangers wandering through their open houses.
Zillow recently released an article summarizing the effects of past pandemics on housing and economic activity.2 It shows that during the 2003 SARS outbreak in Hong Kong, home sales plummeted from 33-72% during the impact period, but home prices stayed pretty much the same. Once the epidemic had subsided, “transactions snapped back to normal volumes,” according to the report. Based on this, we now believe 2020 purchase volume could decline by 50-60%.
However, refis are going through the roof. Mortgage interest rates hit record lows in early March and the MBA Refinance Application Index hit 6,418.9, its highest level since 2003. Lenders are plowing through those applications, many with processors working from home. For now, we’re sticking with our earlier 2020 estimate with refi volumes 51% higher than 2019.
In some respects, the current situation seems eerily similar to the days and weeks following the Pearl Harbor attack in 1941. The event is changing virtually everyone’s life. Industry is shifting gears to produce goods needed for this new wartime effort – more ventilators, respirator masks, hand sanitizers, etc. Innovation and adaptation are rampant, with researchers racing to find a vaccine and many schools and workplaces shifting to online formats.
For the housing and mortgage industries, the successful firms will be the ones that can adapt the quickest. For lenders, that means taking advantage of the current surge in refi volumes but staying poised to handle the likely rebound in purchase volume once the pandemic subsides.
We at iEmergent are dedicated to helping our clients successfully weather this upheaval by providing timely information and advice.
1 Diane Olick, “February pending home sales jump over 9% annually, ahead of major Coronavirus impact,” CNBC.com, March 30, 2020. https://www.cnbc.com/2020/03/30/february-pending-home-sales-jump-over-9percent-annually-ahead-of-coronavirus-impact.html
2 Svenja Gudell, “Information From Past Pandemics, And What We Can Learn: A Literature Review,” Zillow.com, March 13, 2020. https://www.zillow.com/research/pandemic-literature-review-26643/