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Housing Market Shines a Hopeful Beacon for a Plague-Ravaged Economy

Last Updated September 23, 2020 1:54 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:54 PM
  • Mortgage applications for home purchases rose for a third straight week, indicating that demand remains strong despite the coronavirus pandemic.
  • Applications could spike even further as more states begin to revoke their stay-at-home orders.
  • Will the pent-up demand seen in the housing market translate to other sectors of the economy too?

In an economy ravaged by a sudden stop in business activity and skyrocketing unemployment , the housing market continues to provide a solitary glimmer of hope for the optimists.

The latest data from the Mortgage Bankers Association suggest that demand really is pent up, with mortgage applications for home purchases rising for a third consecutive week .

Housing Market Data Point to Pent-Up Buyer Demand

Overall mortgage applications rose just 0.1% on a seasonally adjusted basis, solely due to a marked dropoff in refinance applications. Though still 19% lower than the same week a year ago, purchase applications jumped 7% for the week ending May 1.

That date is key, because it means the data were collected before most states had begun officially reopening their economies.

Mike Fratantoni, MBA’s senior vice president and chief economist, said the strong purchase volume indicates that there’s plenty of “pent-up demand” among homebuyers:

Although purchase activity remains almost 19 percent below year-ago levels, this annualized deficit has decreased as more states reopen amidst the apparent, pent-up demand for homebuying.

And with dozens of states beginning the long road back to “normal” this week  – and some percentage of furloughed employees in those states getting back to work – the hope is that even more buyers – and sellers  – will return to the housing market.

The question is whether housing market strength is a leading indicator for the remainder of the economy, or if unique forces are driving its resilience.

Mortgage Rates Stoke Purchase Demand

Housing market analysts continue to credit low mortgage rates for sustaining demand among homebuyers.

The average interest rate for 30-year fixed-rate mortgages fell to 3.4% last week, a record low in MBA’s survey. Freddie Mac’s latest analysis found an even lower figure.

mortgage rates on 30-year fixed rate mortgage, housing market
Plunging mortgage rates have helped whip up demand in the U.S. housing market. | Source: Freddie Mac 

For a $200,000 loan, the average borrower can save more than $25,000 in interest over the 30-year term compared to a year ago, when the average rate stood at 4.09% , according to Bankrate.com.

So although economic uncertainty might make a home purchase more precarious for many would-be house-hunters, the allure of today’s rate environment may be keeping others in the market.

We’ll soon find out whether the underlying strength in the housing market is indicative of organic consumer behavior – or if low rates are whipping up inflated demand among potential homebuyers.

Is the Housing Market a Signal of Economic Resilience – Or Just an Outlier?

A majority of Americans claim they have been spending less money  during the coronavirus pandemic. Gallup says this is the highest percentage since the financial crisis.

consumer spending habits
More than half of Americans say they are spending less money than usual. | Source: Gallup 

The data support the Gallup survey findings. The U.S. personal savings rate surged to 13.1% in March , its highest rate since 1981.

Even more troubling is that double-digit inflation drove interest rates as high as 20% in 1981, which incentivized saving. With interest rates expected to hold near zero indefinitely , savers reap virtually no “rewards” today.

u.s. economy, savings rate
Source: Twitter 

While a portion of that spike can be chalked up to longer-term fears about job loss and financial market instability, some of it may be attributed to the simple fact that lockdowns have left consumers with fewer places to spend their money.

The shape of the economic recovery may depend on how much of that savings rate surge lingers once the stay-at-home orders end.

Consumer spending has long been the “linchpin” of the economy, and the (relatively) bullish case for the economy  relies on Americans returning to their previous spending habits once the health crisis is over.

Absent that, even a U-shaped recovery might be out of reach. Economists are beginning to fear it could look a lot more like a Nike swoosh .