Have purchase applications already bottomed out?
Source: Housing Wire | Logan Mohtashami
Historically, the heat months for the purchase application data are from the second week in January to the first week in May. During this period, purchase applications are at their highest volume for the year and set the pace for what we should expect for the year.
As it happens, for 2020, a portion of the heat months was also the time when coronavirus hit the U.S. and the period when the highest number of communities were under stay-at-home restrictions.
It remains to be seen if purchase application demand has merely been delayed or if it has been obliterated for the rest of 2020.
In the period BC (Before Coronavirus), housing demand was robust. We had double-digit year-over-year growth in purchase applications and existing, and new home sales were running at levels above my 2020 forecast.
In the weeks preceding the first COVID-19 stay-at-home order in the U.S., purchase applications were up anywhere between 8% and 16% compared to last year. Existing and new home sales had their best start for a year, with cycle highs in demand.
Then, communities began to shut down.
I predicted on HousingWire weeks ago we would see over 54% declines year over year in the weekly data as a result of the shutdowns. Since then, over 30 million Americans have filed jobless claims. Because of this and the mortgage market meltdown that started on March 9, credit has gotten tighter – specifically in the non-QM market, and for FHA loans for lower FICO score candidates. Mortgage rates initially went higher, too, when the mortgage market meltdown occurred. You had multiple factors that would facilitate a 54% plus decline year over year in purchase application data.
We have not yet seen 54% declines in the purchase application data in the week’s AD (After Disease), but we did get as low as down 35% year over year a few weeks ago and have averaged a year-over-year decline of 25.6% during the AD period. Applications have been down 11%, 24%, 33%, 35%, 31% and 20% in the previous few weeks of the heat months. (See graph below).
So, while I hesitate to say this, it could have been worse.
I usually pay no attention to the week to week data, and in fact, I have written a lot about the importance of following longer trends in the year over year data to detect the signal from the noise of natural variations in the data.
But these are different times. I admit I was shocked to see that last week we had a 12% growth in purchase applications, compared to the previous week. Obviously, two weeks of data isn’t enough evidence to support that this is as low as the data will go, but the data did go in the right direction. We need to keep a watchful eye on purchase application data in the upcoming weeks. If the 35% year-over-year decline in this index was the bottom for 2020, then I will gladly say that my outlook was too pessimistic.
But wait, there’s more!
Before you accuse me of optimism bias or ignoring the law of small numbers, here are two more data points that support keeping a close eye on the year-over-year decline bottoming.
First, we all remember that mortgage rates spiked after March 9, the start of the mortgage market meltdown. Since then, as a result of government action to stabilize the markets, pricing for mortgage rates have been coming down, which is always a stimulus to housing demand… even in strange times.
Second, while a lot of attention has been given to recent big moves in the stock market, many seem to have missed the big moves in the St. Louis Financial Stress Index. We want to see this index below 1.21% (It is currently at 1.95%), and eventually under zero for many weeks before we can declare one of the key indicators is finally in a good place. (See graph below).
We still have a long way to go to get to the AB stage (America is Back), but we may be seeing a few glimmers of hope.