Economic Update (June 29, 2020)

[Lloyd Segal]

Economic Update
(Monday, June 29, 2020)

The economy turned the corner in May after the sharpest and fastest downturn in U.S. history, but further progress in recovering from the pandemic is likely to come much slower. Millions of Americans remain out of work, businesses are struggling to get back to normal, and the U.S. simply doesn’t need as many employees with the domestic and global economies mired in a deep slump. With that as a backdrop, let’s dig deeper…

LA County COVID-19 Cases. Los Angeles County now has the dubious distinction of having more Covid-19 cases than any other county in the United States! At least 88,262 infections have been confirmed so far. Just over 10 million people live in LA County, meaning the infection rate is around 870.79 cases for every 100,000 residents. Of the 978,915 Angelenos who have been tested, eight percent have received positive results. For comparison, the entire state of Florida, home to an estimated 21.5 million residents–and cited by many as an example of a state that may have rushed to reopen too quickly–now has a total of 100,000 confirmed cases statewide. Following L.A. County on the list is Cook County, Illinois, where Chicago is located. That county has logged 87,700 confirmations among a population of just 5.2 million residents. Next on the list of most coronavirus confirmations is Queens Borough of New York City, with 64,000 cases among a population of 2.27 million.

Pending Home Sales. The index of pending home sales soared 44.3% in May (compared with April), the National Association of Realtors reported today. The monthly increase was the largest ever in its history! This is a spectacular recovery for contract signings, and goes to show the resiliency of American consumers and their desire for homeownership. The index measures real-estate transactions for previously-owned homes where a contract was signed but the sale had not yet closed. Compared with a year ago, contract signings were still down 5.1%, a sign of how steep the declines in March and April were given the record monthly increase in May. Every region saw a monthly increase in pending home sales, led by the West (up 56%). The rebound in pending home sales means that there likely won’t be repeats of May's significant downturn in existing-home sales for months to come. It appears that home buyers are eager to re-enter the housing market. As such, the typically busy spring home-buying seasons appears to have been delayed for most buyers rather than foregone outright. Still, buyers will face trouble finding homes to buy. Sellers are still reluctant to list their homes because of concerns about the coronavirus and the economy. For buyers in today’s market, it means they can expect more competition and higher prices for the properties that are available.

Existing Home Sales (National). Sales of previously-owned homes slid 9.7% in May as the coronavirus pandemic continued to weigh on the U.S. real estate market. Existing-home sales occurred at a seasonally-adjusted annual pace of 3.91 million, the National Association of Realtors reports. It was the lowest level for existing-home sales since July 2010. Compared with last year, sales were down 26.6% in May. There was a 4.8-month supply of homes for sale in May down from April, meaning inventories are low, very low. Typically, a 6-month supply of homes is indicative of a balanced market. Additionally, the median existing-home price last month was $284,600, up 2.3% from May 2019. The pending home sales report reflect real-estate transactions where a contract was signed but the sale had not yet closed, and is considered to be a barometer of future sales reports. The existing-home sales, meanwhile, measures transaction closings. Consequently, the downturn in pending home sales in March and April served as a warning that May’s existing home sales numbers would be down considerably. The report will probably not show significant improvement until June’s data is reported in July. May’s report aside, most signs point toward a rebound in the housing market following the downturn caused by the coronavirus pandemic. But the downturn in the inventory of homes for sale could prove problematic for buyers.

New Home Sales. New single-family home sales increased 16.6% in May to a 676,000 annual rate. The months' supply of new homes (how long it would take to sell all the homes in inventory) fell to 5.6 months in May from 6.7 months in April. The decline was due to both the faster pace of sales and a decrease in inventories (7,000 units). The average price of new homes sold was $368,800, down 2.7% versus last year. Following three consecutive months of declines, new home sales came surging back in May as lockdowns eased around the country. Keep in mind that sales of new homes are counted when the contracts are signed, so they represent a timelier indicator of activity than existing homes sales (which are counted at closing). It looks like the recession for the new home market was shorter and shallower than for the rest of our economy, with sales now up 12.7% from a year ago. There are a couple of factors that should continue to drive new home sales higher in the months ahead. First, affordability is increasing (see Home Affordability below). Fed liquidity measures have helped fully reverse the spike in mortgage rates that happened in the aftermath of the US virus outbreak and rates now sit at record lows. And as rates trend lower, more people can afford a new home. Second, the median sales price for a new home is down from pre-pandemic levels. Third, buyers' preferences look to be shifting away from denser urban environments (due to the pandemic), and toward more spacious options in the suburbs where most new homes are built. However, a lack of finished new homes available for buyers could be a headwind for sales going forward. The inventory of unsold homes that are either under construction or finished is still down from a year ago. Given the downward pressure that lockdowns and social distancing continue to exert on new construction, do not expect an oversupply of homes anytime soon. As a result, watch for new home prices to trend upward in the next several months.

Flipping Houses. ATTOM Data Solutions released its first-quarter 2020 “” showing that 53,705 single-family homes and condominiums were flipped in the first quarter. That number represents 7.5% of all home sales in the nation during the quarter, up from 6.3% in the fourth quarter of 2019. (Of course, this was before the pandemic, so these numbers must be taken with a grain of salt.) The gross profit on the typical flip nationwide (the difference between the median sales price and the median paid by investors) also increased in the first quarter of 2020, to $62,300. But with home prices rising, that $62,300 profit translates into only a 36.7% return on investment compared to the original acquisition price, down from 39.5% in the fourth quarter of 2019. While it remains unclear how hard the housing market will get hit by the pandemic fallout, a drop in prices could further erode investor profits and cloud the future of your home-flipping activities. Among U.S. metro areas with enough data to analyze, 13 of the top 15 were led by San Francisco (gross profit of $171,000), San Jose ($165,000), and Los Angeles ($145,000). Home flippers who sold homes in the first quarter of 2020 took an average of 174 days to complete a flip, up from an average of 169 days in the fourth quarter of 2019. Among 1,560 U.S. zip codes with at least 10 or more home flips in the first quarter of 2020, there were 29 zip codes where flips accounted for at least 25 percent of ALL home sales last year, including zip code 90222 in Los Angeles (34.9 percent).

Home Affordability. ATTOM also released its second-quarter 2020 U.S. Home Affordability Report, showing that median prices of single-family homes are more affordable than historical averages in 49% of U.S. counties (up from 31% a year ago). The report determined affordability for average wage earners by calculating the amount of income needed to make monthly house payments — including mortgage, property taxes and insurance — on a median-priced home, assuming a 3% down payment and a 28% maximum “front-end” debt-to-income ratio. That required income was then compared to annualized average weekly wage data from the Bureau of Labor Statistics. Compared to historical levels, 200 of the 406 counties analyzed in the second quarter are now more affordable, up from 126 of the same group of counties in the second quarter of 2019. The latest affordability numbers reveal a win-win situation for sellers as well as buyers. Prices are rising again around the country during the current home-buying season, despite worries that the Coronavirus pandemic would halt the nine-year runup in home values. But a combination of wage gains and declining mortgage rates are helping to override the increases and make homes more affordable in large swaths of the United States. Nevertheless, recent pandemic concerns are still quite valid and may show up in the coming months, which could hurt prices as well as affordability. But as of now, things are looking up for people on both sides of the buying equation. Average annualized wage growth is outpacing home price appreciation in the second quarter of 2020 in 137 of the 406 counties (34%), including Los Angeles County.

Weekly Housing Recovery Report. Realtor.com released its Weekly Housing Recovery Report which is always interesting to real estate investors. The Report reveals that cities with strong tech job creation pre-COVID are bouncing back more quickly than others. As the market heads into the summer, growth in online home searches has surpassed pre-COVID levels, but movement in supply and time on market remain well below seasonal pace. Locally, the story is much more nuanced. Local cities with stronger job creation pre-COVID are proving to have the crucial edge for real estate activity, particularly those with a strong technology sector. As more tech companies weather the storm, the stable jobs and incomes they offer will continue to power demand for homes in these areas, enabling home sales to bounce back faster than the rest of the country this summer. The national index reached 90.0 nationwide, indicating that the U.S. market has nearly halfway recovered to its January 2020 levels. This week's reading was up 1.2 points higher then the prior week, but 10.0 points below the January trend baseline. The local index indicates that four new markets have crossed the recovery index benchmark this week -- Seattle, Rochester, N.Y., Las Vegas, and Los Angeles -- taking the total number of markets above the January baseline to eight.

Better Dead Than Alive? The Internal Revenue Service sent out 1.1 million stimulus checks to dead people totaling $1.4 billion, according to the Government Accountability Office. Overall, the IRS distributed 160.4 million stimulus checks, dubbed “economic impact payments” either as direct deposits, paper checks or debit cards, totaling $269.3 billion. The $1.4 billion paid to dead people accounts for 0.5% of that total. Chump change, so to speak. As the IRS hurried to process direct payments to Americans reeling from the coronavirus outbreak, they apparently didn’t bother to use Social Security death records to filter out payments to the deceased. The IRS has full access to the Social Security Administration’s death records, but their Bureau of Fiscal Service, which actually distributed the money, does not. Last month, Treasury Secretary Steven Mnuchin said the relatives of dead stimulus checks recipients need to return the money. But Mnuchin failed to explain what would happen if they did not.


Weekly Jobless Claims. New applications for unemployment insurance fell slightly last week to 1.48 million, the Labor Department reports. But they remain stubbornly high three months after the start of the coronavirus pandemic. While it marked the 12th straight weekly decline, new claims are still extremely high and raise questions about whether a small rebound in the economy after a prolonged coronavirus-tied shutdown is about to hit a wall. If people who applied for benefits through a temporary federal program are included, new claims totaled an unadjusted 2.19 million last week. That was down slightly from a revised 2.2 million. The number of people who are actually receiving traditional jobless benefits, meanwhile, slid to 19.5 million in the week ended June 13 from 20.3 million. These so-called “continuing claims,” reported with a one-week lag, have fallen painfully slow after peaking in the middle of May at nearly 22.8 million. More than 50 million applications for benefits have been filed in the past three months. Before the crisis the states were handling only 222,000 claims per week. If the government is accurately capturing the number of people applying for jobless benefits, the slow decline in new claims is troublesome enough. But the new round of coronavirus outbreaks in heavily populated states such as California, Florida and Texas could make it worse if businesses are forced to scale back again. The concern is what the July and later months could show, given still high initial claims and rising Covid-19 counts in many states.

Durable Goods. Orders for durable goods (such as autos) surged 15.8% in May after historic declines in the early spring when the U.S. was locked down. But manufacturers are likely to struggle to make a more rapid recovery amid the fresh outbreak of the coronavirus and a depressed global economy. After all, orders had tumbled 18% in April and almost 17% in March, so manufacturers have lots of ground to make up. But it won’t be easy. The U.S. is expected to experience big hiccups as employees and companies grope for ways to return to work safely amid an ongoing viral outbreak. In fact, this new wave of cases in the states that reopened earliest could sidetrack the fledgling recovery. Orders for automakers, whose bookings fell by two-thirds in March and April, climbed 28% last month, although they still remain well below pre-crisis levels. Boeing, the giant airplane manufacturer, reported zero new orders in May, but cancellations declined, so they were relieved. The airline industry remains mired in a deep slump, though. Airlines have suffered a collapse in passenger traffic and are barely scraping by even with massive government assistance. It could be years before domestic and global travel returns to normal and demand for new planes is restored. Bookings rose 9.1% for metals and 7.4% for fabricated parts. Orders barely rose for computers and heavy machinery. Already weak before the pandemic, business investment is likely to remain low until companies get a better sense of how rapidly the economy is recovering and to what extent customers come back.


Personal Income. Personal income declined 4.2% in May, but is up 7.0% in the past year. In contrast, personal consumption rose 8.2% in May while declining 9.3% in the past year. After adjusting for inflation, "real" consumption increased 8.1% in May but is down 9.8% from a year ago. Confusing right? Join the club. Spending rose and government transfer payments (think the $1,200 "economic impact payments") fell, as the reopening of America kicked into gear in May. As expected, incomes took a hit coming off the inflated April number that reflected government stimulus checks. But outside of government transfer payments, personal income rose by only 1.6% in May, led higher by wages and salaries (which should come as little surprise given the net 2.5 million jobs that returned in May). Even with the increased spending and decline in incomes, the savings rate remained elevated in May at 23.2%. This is down from the 32% rate we saw back in April, but still well above "normal" levels. On the spending side, personal consumption surged 8.2% in May, the largest monthly increase in the report's history (through coming off two straight months of record monthly declines). The rise was led by spending on goods, which grew 14.1%. Within that category, durable goods led the way, as consumers picked up purchases of autos and recreational goods and vehicles. Spending on services rose 5.4% in May, as, once again, health care spending showed one of the largest movements, up 23.7%. On the inflation front, PCE prices rose 0.1% in May and are up only 0.5% from a year ago.


Segway Is No More. Remember those crazy two-wheeled personal transporters that were going to revolutionize transportation? Yes, of course you do. Well, those rolling death traps have finally reached the end of the road. Founded by Dean Kamen in 1999, the Segway had several problems, including a cost of $5,000 which was prohibitive to most consumers. Not to mention, it was a challenge to ride because you had to balance at a specific angle for the vehicle to move forward. If your weight shifted too much in one direction, it could easily spin out of control and throw you off. In fact, they were banned in some cities because users could easily lose control if they were not balanced properly and severely hurt themselves. The Segway only ever became popular with tourists and police officers, and never gained traction with a wider populace. Actually, the Segway became better known for its high-profile crashes than its efficiency. In 2009, Kamen sold the company to British millionaire Jimi Heselden, who promptly killed himself when his Segway careened over a cliff in West Yorkshire, England. George W. Bush just missed a similar fate after falling off a Segway at his parents’ summer home in Kennebunkport, Maine. In 2015, a cameraman riding on a Segway ran over Usain Bolt as the Jamaican sprinter was doing a victory lap in Beijing, China. Apparently even the fastest man on earth couldn’t avoid a Segway.

Dixie Chicks. The Dixie Chicks are no more! The Ladies announced that they are changing their name and will now go by just “The Chicks.” (The word “dixie” is associated with the pre-Civil War South.) The move comes in response to the worldwide protests against police brutality and systemic racism following the death of George Floyd. "As a band, we have strived for our music to be a refuge…inclusive of all," the band said in a statement. "We’ve watched and listened more than ever these last few weeks, and our hearts have been stirred with conviction, our eyes opened wide to the injustices, inequality and biases Black women and men have always faced and continue to face everyday. Now, blind-spots we didn’t even know existed have been revealed, including our name.” BLM.

This Week. Looking ahead, investors will continue to watch for news about medical advances, vaccines, new Covid-19 outbreaks, government stimulus programs, Fed monetary actions, and the reopening the economy. Consumer Confidence will be released tomorrow, Tuesday (6/30). The ISM national manufacturing index will be released on Wednesday (7/1). In addition, the monthly Employment report will be released this Thursday (7/2), and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. So get ready! Markets will be closed on Friday in observance of July 4.

LA County Round-Up:

Total houses sold: 3,167 May (down 52% from last year)
Median days on market: 44 days (down 4% from last year)
Median sales price: $635,000 (up 1% from last year)
Median price per sq. ft: $433 (up 3% from last year)
Sold above listing price: 39% (up 1% from last year)
Inventory supply: 4.4 months (up 47% from last month)

Calendar:
Tuesday, 6/30: Consumer Confidence
Wednesday, 7/1: ISM Manufacturing
Thursday, 7/2: Employment

Weekly Change:
10-year Treasury: fell 0.03
Dow Jones: fell 600 points
NASDAQ: fell 150 points