Last week we reported that consumers are paying down their credit card debt. We also mentioned that mortgage debt and mortgage originations were on the rise. Today we are going to delve further into that phenomenon.
Tim Ellis, a Senior Data Journalist at Redfin, has had much to say on the subject in the past couple of weeks. As a matter of fact, he gave us these four key takeaways for the 4-week period ending August 9th:
- Home sale prices were up 10% year over year—the largest increase in over six years.
- 46% of homes accepted an offer within their first two weeks on the market.
- Pending home sales were up 13% year over year. And,
- The supply of homes for sale continues to fall and is down 28% from a year ago (even though new listings are essentially the same).
That’s a lot to digest, but at the risk of giving you indigestion, we’re going to add more. Redfin conducted a survey of how homebuyers’ searches have changed since the pandemic. They found that 19% of people that originally sought housing in urban areas have changed their preferences to either suburbs or even rural areas.
We knew anecdotally that was a new trend - moving from an apartment in a crowded city to a house with a home office and a yard, but it’s good to have it quantified. In fact, Redfin reports the median sale price for rural homes has increased more than 11% from a year ago. Supply and demand at work.
Yet, we are faced with the highest unemployment rates since the 1930s and moratoriums on foreclosures that won’t last forever. The combination of which could serve to flood the market with homes causing prices to drop back down.
Adding to the equation, we have a precarious employment situation. To get a better handle on the effect of the pandemic on the labor market, the U.S. Bureau of Labor Statistics (BLS) added new questions to its monthly population surveys. As a result, we know that 35% of workers teleworked at some point in May as a direct result of the pandemic. That was down to 31% in June.
The number of people unable to work their full schedule due to COVID declined from May to June (49.85 million to 40.4 million). Fewer than 20% of those employees received any pay from their employers for the lost time.
In addition, there are about 7 million people who are not employed but were discouraged from looking for work because of the pandemic. These people are not recorded in the official unemployment rate, but they are not employed either, which makes paying for housing, or anything else, pretty difficult.
So, while residential real estate has historically been one of the safest investments (and that goes for banks as well as people), there are exceptions. Just as we witnessed in 2008 (at the risk of being cliché) too much of a good thing is still too much.
At March 31, 2020 financial data, over 750 U.S. banks had more than 50% of their total loan portfolio invested in the “safety” of home loans. However, 54 of them also reported that more than 3% are 90 days or more delinquent. And that’s likely to get a whole lot worse before it gets better. Those 54 banks are listed on page 7.
Bankers are preparing themselves for this eventuality. In the first quarter of this year alone, provisions for credit losses were up $38.8 billion or 280% from a year earlier. And, in spite of the moratoriums on foreclosures, net charge-offs rose 15%. Since residential real estate is not part of these charge-offs (yet), the majority (68%) was in commercial and industrial loans. Credit card portfolio charge-offs rose 4.4%.
We have second quarter data in–house now and our analysts are pouring over it. This pandemic has not made their jobs any easier, but we can already tell you that second quarter loan loss provisions dwarfed those of the first quarter. Aside from that, you’ll have to wait until next week.
In the meantime, if anyone hears of a bank offering decent CD rates that we don’t already have listed, please share. We welcome all recommendations. Email to Caroline Jervey at email@example.com.