US Existing Home Sales June Preview:  Old news on jobs and confidence

Sales of existing homes, the largest category in the US market, are expected to recover after plunging to their lowest level since the collapse of the housing bubble a decade ago.

Purchases of previously occupied homes are forecast to jump 24.5% in June to a 4.8 million annual rate following May’s 3.91 million as the lowest montages rates in history have encouraged buyers despite 11.1% unemployment and the uncertain economy.

Homes that have had at least one prior buyer are 90% of the US market and they dropped to 3.83 million in July 2010 in the aftermath of the financial crisis.

Mortgage rates

Mortgage rates have declined sharply since the middle of March as the Federal Reserve has intervened in the Treasury market buying bonds and mortgage-backed securities to force interest rates lower in response to the economic damage from the pandemic.

 The nationwide average for a 30-year fixed rate mortgage, the most prevalent in the US market, has fallen from 3.45% on February 6 to 2.98% on July 16. Before the pandemic the all-time low had been 3.41% on July 7, 2016.

Labor markets, consumption and consumer confidence

The decline and partial recovery in the labor market, almost 17.5 million people were receiving their initial unemployment claims allotment in the latest week, has left the jobless rate at 11.1%, higher than the 10% peak of the financial crisis recession.  

Reuters

Though retail sales have rebounded smartly soaring 18.2% in May and 7.5% in June after plummeting 8.2% in March and 14.7% in April, these sales reflect the return of deferred purchases as much as normal consumption.

The rising numbers of coronavirus case in several states have made a full economic recovery problematic as a number of the largest states have rolled back or delayed reopening measures.

Consumer confidence indexes reflect the uncertainty about the job markets and the economy overall. For July the preliminary Michigan consumer sentiment index dropped to 73.2 from 78.1 in June, missing the 79 prediction by a wide margin. The Conference Board consumer confidence index is expected to slip to 96.3 in July from 98.1 in June when it is reported on July 28.

Conclusion and the markets

For the majority of American home owners their largest and longest lasting financial transaction.

The ability to qualify for a mortgage and confidence to try depend, more than anything else on long-term employment prospects. That sanguine labor market of the three years prior to February, which saw the highest rate of home sales in 13 years, is gone, replaced by mass unemployment among those would in most cases not be buying a home and endemic worry among the employed who might.

The housing market will cannot return to normal until the first group is back at work and the second is secure in their jobs.  Mortgage rates operate at the margin of the housing markets, even record low costs cannot create confident demand.  

Markets have not historically treated the US housing market as an indicator or trading event and even if the downside risk to the June number is realized it will be old news.

The weakening dollar performance over the past few weeks has been the final retreat of the pandemic risk premium aided in the case of the euro and sterling by prospects of a euro zone economic relief package.

No result from the US home market will change those views.