Morning Commentary: The Housing Bounce

Foreign Exchange - Morning Commentary
The Housing Bounce
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The recovery in housing has been nothing short of impressive with market data showing home sales in July running above February levels.  Nevertheless, things aren’t all positive in the housing market with an increasing number of homeowners falling into delinquency. 

According to the Mortgage Bankers Association (MBA), the mortgage delinquency rate is currently around a 9-year high.  Sadly, this isn’t a surprising result given the rapid rise in unemployment and loss of salary income following the sizable pandemic shock.  What is unprecedented is the simultaneous strong bounce in housing demand and move higher in mortgage delinquencies, but such is the uneven nature of this recession.  

Because of this unique backdrop, the rise in delinquencies is unlikely to usher in a wave of foreclosures like we saw during the Great Financial Crisis.  Homeowners have more equity in their homes due to the sharp run up in prices and larger required down payments.  Additionally, policy makers have already stepped up with programs to provide relief for homeowners under stress.  So while there will be pockets of stress in the housing markets, the reasons below argue for the durability of the housing recovery.

An uneven recession: The shock disproportionally impacted lower income workers that are less likely to be homeowners.  55% of households earning less than $35K lost employment income vs. 40% of those earning more than $75K.  The median household income of recent homebuyers is $93K.

Record low interest rates: Mortgage rates sit near record lows and it has been estimated that the average monthly mortgage payment has declined by $80/month.

Low inventory: Even pre-pandemic, inventory levels were low with equity high and debt manageable. 

Supportive monetary and fiscal policies: Forbearance programs reduced the potential stress from delinquencies. 
  • Fiscal stimulus talks remain stalled with House Speaker Pelosi saying she would not agree to anything less than $2.2 trillion.  Conversely, Senate Republicans struggle to agree on the $1.5 trillion compromise from the Problem Solvers Caucus.  
  • The US has announced that it will freeze TikTok’s app and ban some transactions over WeChat starting this Sunday.  The government will prohibit US to US transactions related to WeChat but the ban won’t impact activity in China.  President Trump has given until November 12 for national security concerns to be resolved.  If they are, the prohibitions may be lifted.   
  • The UK and Europe are facing the possibility of additional measures to restrict movement as virus infection numbers increase.  Per news reports, the “R” (the virus reproduction rate) is rising and that has led scientific advisors to propose a two-week lockdown.  In the end, a rising “R” does present concerns, but the death rate is likely the ultimate decider on where more aggressive measures are adopted.  To this end, COVID-19 mortality rates remain relatively lower due to better treatment protocols, better awareness and different age distributions of infected people.   
  • The EU should publish a document next week that outlines how it intends to grow its capital markets now that London is outside the bloc.  The European Commission will have to remove roadblocks related to conflicting national regulations and tax and insolvency policies.  
  • Canada’s wholesale trade data beat expectations, but its retail sales print came in lower than expected.  Conversely, retail sales in the UK beat expectations, but this number was helped by some government programs that have since expired with other support programs, such as the jobs furlough program, set to expire soon.
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