Certainly, the economy will do better once the pandemic is damped down. A wide swath of the leisure, hospitality and entertainment sectors of the economy simply can’t fully function while the virus rages. The only question is “how soon?” and for that, there simply isn’t one clear answer available. Meanwhile, the economy that is functioning did so at a pretty solid level in the fourth quarter of 2020, and that despite increasing sickness and tightening of restrictions in a number of hard-hit locales.

After a record annualized decline of 31.38% in the second quarter and an equally impressive 33.33% increase in the third, the economy settled to something closer to normal, sporting a 4.01% annualized increase in the advance reading of Gross Domestic Product for the period. For the year, GDP output shrank by 3.5%, the biggest decline since the Great Recession days of 2009. Comparing the fourth quarter of 2020 against the same period one year ago (pre-pandemic) overall output was about 2.5% lower. Given all that has happened in a year’s time, that’s really not as bad is it could have been. Price pressures settled during the fourth quarter, too, with Personal Consumption Expenditure inflation easing from a 3.7% annual rate to 1.5%, and core PCE for the period downshifting to 1.4% from 3.4% annualized.

The Federal Reserve held its first meeting of 2021 last week, and there was no change to monetary policy. Rather, the Fed simply reiterated its position of holding rates near zero, purchasing Treasuries at $80 billion per month and accumulating new mortgage-backed securities at $40 billion per month. At the close of its meeting, the Fed again noted that “The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.(emphasis ours)

Sales of new homes have cooled from their heady pace of a few months ago, but some seasonal slowing as the holidays kick in isn’t uncommon at all. The Census Bureau reported that 842,000 (annualized) homes were sold in December, up 1.6% from a (downwardly) revised 842,000 in November. No worries, though, since sales are still some 16.5% above December 2019 levels, so it’s not as though the market has slowed appreciably — more like settling back to a more sustainable pace. The supply of new homes available to buy at the present rate of sale rose 0.1 to 4.3 months (302,000 units built and ready for sale) and prices of new homes sold were 2% higher compared to November (about 8% higher than last year during the same month). With spring soon on its way, sales of new homes will likely flare higher again as is the normal seasonal case.

Existing home sales may level off for a bit, though. The National Association of Realtors Pending Home Sales Index was down by 0.3% in December, a fourth consecutive decline. As this is indicative of signed contracts, it’s not surprising to see a softening as during the holidays, as fewer homes are available to buy (inventory levels are presently record thin) and fewer homebuyers are out and about looking at the homes that are available. The PHSI is more than 21% higher this year than a comparable month a year ago, and looking forward, spring’s coming, and it may be that we’ll have a more normal spring housing season this year.

Overall, the economy seems to be back to a much steadier state, and perhaps even poised to start to fill in the remaining growth gap caused by the pandemic before too much more time passes. It does seem like we’ve endured a bit of a soft patch for January; the facts and figures that show this will be revealed in the coming weeks, and the bit of a lull may continue into February, too. That said, the present position overall for the economy isn’t a terrible one, and, with rising vaccination and falling incidence of disease we may be able to get more fully back on track before long.

In the last couple of weeks, mortgage rates have mostly wandered about, favoring a slightly downward bent. That seems to have mostly run its course over the last few days, and so we think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will likely be unchanged when the next report comes on Thursday morning. However, it’s a big week for data to start the month, so there’s perhaps a little uncertainty in this near-term outlook.

Mortgage Market information provided by Jon Aucutt, Main Street Bank
31780 Telegraph Road, Suite 100
Bingham Farms, Michigan 48025
jaucutt@msbmi.com

We can’t know the future, though. Some unexpected something(s) will of course occur in 2021, whether they happen on an individual or intimate basis, or to select groups of folks or even all of us collectively. Housing markets — homeowners and homebuyers alike — are one such collective, and neither could have expected the profound changes and opportunities that arose last year. Even though rates were already pretty low by historical standards when the year 2020 began, they have firmed up a little from their annual low as the year came to a close. With a record-long economic expansion entering its 11th year, a cessation of trade wars that tempered growth and growth picking up speed, odds then favored somewhat firmer rates, but the virus had other ideas.

With one country after another closing, and uncertainty and risks skyrocketing, investors got spooked and came to a point of selling everything to move to cash; interest rates spiked, financial markets became unhinged and central banks across the world moved into emergency positions, slashing rates, buying bonds and opening up new lending and market-support facilities, moving to liquefy every market and be the buyer of last resort for a range of assets if need be. The market panic was quelled, and a depression likely averted. Lockdowns ensured that the economies of many countries would fall into record-setting recession for a time, only to quickly (if partially) emerge.

As they did, unprecedented opportunities arose for homeowners. For those in difficult straits, and with the experience of at least some lessons learned in the last housing bust, a nearly instant forbearance program for homeowners was released, and without even the burden of proof of hardship. Millions signed up; a core of the most troubled homeowners (numbering about 2.8 million) yet remain in forbearance. For others who experienced no payment troubles, opportunities to refinance at record low rates — multiple times — appeared. Freddie Mac’s formal all-time low for a conforming 30-year (3.31%) FRM was touched in mid-April, broken by the end of the month a new record low was set in 17 weeks since then, falling to as low 2.66% near the end of the year.

Potential homebuyers took notice, too. The year began with an early start on the spring homebuying season with a solid winter showing for sales, but that came to a relative standstill in March through May, only to revive with vigor and then some as the economy re-opened through the summer. The delayed action of the spring market was joined by additional demand from second-home buyers looking to escape to remote locations, away from virus and strife, and by buyers who could now work remotely and so no longer felt constricted by proximity to center-city workspaces. With competition for houses fierce and existing home prices rising sharply, it’s also likely that some demand has been “advanced” from the coming year in order to grab a home before costs increased further.

With the existing home market tight and expensive, and possibly with commuting to work far less of a concern, sales of new homes also enjoyed a strong period during the mid-part of 2020, but sales are settling back to a very solid (if less frenetic) trend as the year turns. Before a pandemic dip last spring, sales of new homes had been in a 10-year uptrend, and seem poised to return to that kind of steady, solid (if unspectacular) improvement now that the pandemic distortion in sales has cycled through.

Existing home sales have started to cool a bit from heady annualized levels too, although that’s to be expected as the winter months kick in. The spring-bumped-into-summer housing season has passed, and while there is still plenty of demand there is little supply to be had, and even fewer homes are put up for sale once the onset of the extended holiday (and then winter) season begins. The National Association of Realtors Pending Home Sales Index contracted again in November, declining by 2.6%, a third consecutive decline. Compared to a year ago, though, contract signings are still some 16.4% higher, and if we weigh this change against sales levels last December/January, it looks like this will translate into a 6.25 million (or so) annualized rate of sale. October’s 6.86 million (annual) was the recent peak, and sales are likely to continue to cool somewhat until the next spring cycle kicks up again.

As we look ahead to the coming year there is reason for optimism, what with ever-expanding inoculation (hopefully) allowing for greater freedoms for schooling, travel, entertainment and socialization. Should things work out as hoped, portions of the economy here and elsewhere across the globe that have been severely curtailed could start to re-engage again in a more meaningful way, re-igniting employment gains. Economic stimulus for businesses should help keep at least some of them alive and viable until this happens, while new cash distributed as checks this winter will be available for spending as soon as opportunities arise. Faster growth seems likely in 2021, and will come at a time when the Federal Reserve remains committed to a low-and-liquid stance for monetary policy (although they may need to re-think this sooner than they presently expect).

Overall, for our part, we’re hopeful about the prospects for the year ahead, even it if may be a while yet before seeing someone maskless doesn’t elicit a response. May great things lie ahead for you and yours in the coming year, and happy new year to you all.

Mortgage Market information provided by Jon Aucutt, Main Street Bank
31780 Telegraph Road, Suite 100
Bingham Farms, Michigan 48025
jaucutt@msbmi.com