Is the Housing Market Already Rebounding From COVID-19?
Cabin fever is a real thing. And you don’t have to live in a cabin to get it.
With everyone chomping at the bit to get back to “normal,” I thought it would be useful to check in on the five metrics I previously identified as signals for the beginning of the economic recovery stage that I have been calling AB, or America is Back.
1. Flattened Curve
Status: Close, but stay vigilant
First and foremost, for the economy to get back on track, we needed to dampen then quash the increase in cases of infections per day, nationwide. Only when the spread of the virus is contained can we safely return to work and some semblance of normality.
According to my virus turnaround thesis, “It is from this data that I have based my virus turnaround thesis, which is that by May 18 or sooner, we will see a flattening of the new infection curve, and by September 1, we will be at a much higher capacity to fight this virus.”
While it is true that we have been successful in flattening the curve nationally and testing is more available, there are still spots where the number isn’t doing great.
I do not feel confident in saying the spread of this disease is behind us, so I cannot give this indicator and all clear just yet.
If we have genuinely contained the spread of the virus, we will not get a noticeable rebound of cases when we begin to progress through the stages of reopening the economy.
This is up to us. A second wave is likely but not inevitable. If we continue to wear masks when appropriate, religiously wash our hands and remain vigilant against possible contamination, by September 1, we will be in a better position to handle whatever the fall and winter bring.
2. End of Stay-at-Home Orders
Status: On Our Way
The second indicator of economic recovery is the end of stay-at-home orders and the reopening of commercial businesses.
We are in the very early stages of this process, but it has begun at some level all across the country. Over this past Memorial Day weekend, we saw a lot of Americans doing normal weekend activities. Some with masks and some without. Remember folks, winter is coming.
3. 10-year Yield Goes Above 1%
Status: Not Yet
Before the 10-year yield broke under 1% this year, I stated that in a recession, we could expect the 10-year yield to be between -0.21% and 0.62%.
On March 9, the 10-year fell to 0.34%, but for the most part, since the start of the COVID-recession, the 10-year has been above 0.62%. Considering the massive job losses and other dreary economic data, this yield may seem high.
But it makes sense if you assume that the bond market is anticipating that Q3 and Q4 economic data will be better. A rebound in infections, reinstating stay-at-home orders, and/or the removal of fiscal or monetary support are all things that could drive yields lower.
On the other hand, if the economic data gets better – such as a decrease in jobless claims – yields will go higher, signaling real economic growth is coming back. We are not there yet. When we get into a range between 1.33% and 1.6% on the 10-year yield, we can consider this bullish.
4. Decline in Credit Stress and Jobless Claims
Status: 1 out of 2
The St. Louis Financial Stress Index, which measures the degree of financial stress in the U.S. financial markets, spiked aggressively to 5.379% on March 20. Since the peak, the index has taken it a dramatic dive. (See graph below).
A level below 1.21% would indicate some calmness in the markets, but the ultimate goal would be to see the index go and stay below zero, indicating stable market conditions common with the economy growing. Currently, it is at 0.6166%
It is important to remember that the St. Louis Index is a financial markets index – not an index of the overall economy. Employment may be a better measure of that.
And that does not look good.
While the rate of growth of jobless claims has fallen in the last week, cumulative job losses are tragically high, with over 38.6 million Americans filing for unemployment in a short time. Providing fiscal support by increasing unemployment benefits and providing loans to Americans has prevented a profound deflationary event, and as such, has been one of the most successful economic policies I have seen implemented in my lifetime.
5. Data from the hardest-hit sectors start to trend upward
The fifth metric I look at to determine where we are on the road to recovery is movement in the hardest-hit sectors like dining, lodging, and travel.
Because growth in these sectors is from the lowest levels, they provide a sensitive measure for growth. Auto sales, miles driven, bar patronage, domestic flying, restaurant dining and hotel lodging are all bouncing from the bottom and starting to move higher.
For the housing market, purchase applications were one of the hardest-hit segments and thus are a sensitive metric to watch for potential recovery.
From the peak rate of growth on purchase application to the lowest year-over-year decline, we have had a 52% move lower in 2020. Year over year, purchase applications fell as much as 35% in the weekly reports. Since that nadir, purchase applications have been showing smaller and smaller year over year declines, with the last report showing only a 1.5% decline from the same period of the previous year. We may even see the first positive year over year print this week!
Because housing is such an essential sector to the overall economy I am more than a little excited by this trend.