KEY DATA: Sales: -8.5%; Over-Year: +0.8%; Prices (Over-Year): +8%/ Phil. Fed (NonMan.): down 61.3 points; Firm Activity: down 69.7 points; Expectations: down 8.9 points
IN A NUTSHELL: “The housing market is starting to get sick.”
WHAT IT MEANS: Few sectors are immune from the virus ravaging the economy and it is not a surprise that housing is starting to show strains as well. Going into March, this portion of the economy was in really good shape and was expected to lead the way. Sales were strong and prices were starting to firm. However, given the realities of social distancing, it is hard to convince people making their largest purchase that the house they are seeing on the Internet is the home for them. True, everything you see on the Internet is true and accurate, but it you believe that, I’ve got a fixer-upper that is in pristine condition. Make me an offer. And that is the problem now, especially on the demand side. The National Association of Realtors reported that sales fell sharply March and every region declined. But to show how strong the market has been, the sales pace was still above the level posted in March 2019. Though the inventory of homes for sale rose, it is still low. It will be interested to see if supply drops in the April report. I have heard from realtors that they are pulling a lot of homes temporarily from the market. Finally, prices soared.
The Philadelphia Fed’s index of nonmanufacturing firms crashed and burned in early April. The index of economic activity dropped to -96.4. The lowest possible is -100 and that was not reached because 1.8% of the respondents said regional business activity rose. The other 98.2% said it declined. No one said it remained the same. Amazing. As for their own firm, 85.4% said activity fell while only 2.9% indicated it was up. But those are hardly surprising results. What was discouraging were the expectations data. Confidence about regional and firm activity six months from now deteriorated. Despite all the stories of reopening, business leaders seem to be less hopeful a return to good growth is in the cards.
MARKETS AND FED POLICY IMPLICATIONS:The March data are trickling in and they are hard to get a good handle on the extent of the damage. For some industries, the shutdowns didn’t occur until well into the month. Thus, the readings represent a combination of pre and post-shut-down economies. That is the case with the housing market. We will not really know the extent of the harm until the April numbers are released. It is hard, though hardly impossible, for closings to happen (for existing homes sales) or for contracts to be signed, which go into new home sales. But virtual visits don’t replace in-person walk-throughs and as anyone who has bought a home knows, it is the feel that usually matters. Pending home sales, which will be released on April 29th, should tell us a lot about the existing market. As for the economy, some states are trying to start things back up.The risk/reward of that is being hotly debated, but the downside seems to be a lot greater than the upside since there will be only modest initial increases in hiring and output. A resurgence of the virus in those states could set back the process significantly. But the governors in those states are willing to take that chance, so we are starting what is rare in social science: A real world mass experiment. Meanwhile, the total and complete collapse of near-term oil prices shows the extent of devastation (and the impact of the Russia/Saudi price war). It is unclear whether this will alter the thinking of most investors who apparent believe that the pathway back to normal is a V-shaped huge and rapid recovery.But it is a warning.When you start paying people to hold your product, you are in deep trouble. That is what negative interest rates signal – massive economic weakness. The Fed seems willing to shower the economy with all the liquidity it can handle and more, if necessary, so I don’t expect negative rates to become policy – thankfully. But negative commodity prices are something we should not simply dismiss, even if they are only temporary. The enormous problems we face in restarting an economy this big and this damaged have to be discussed first and then addressed. Policymakers are treating the symptoms but have not even started the process of formulating a plan to reverse the damage.