Zillow Market Pulse: July 10, 2020

The number of mortgages in forbearance fell. The price of homebuilding materials has risen sharply. And the Federal Reserve’s lending program for small businesses is struggling to gain momentum.

• • According to Black Knight, 435,000 fewer loans were receiving assistance last week than the week prior.
  • The decrease was driven in large part by the expiration of some deals struck in early April.
• • The price of lumber futures has risen more than 85% since early April.
  • Improved builder confidence, as well as increased interest in home improvement projects, is likely fueling a surge in demand.
• • Strict conditions for businesses and heightened levels of risk for banks has led to a slow roll-out.
  • Thousands of banks are eligible to participate as lenders, but only 300 had registered as of last week.

 So what?

The decline in McFarlin painting contractors mortgage forbearance participation offers both positive and negative signs for the housing market. The 435,000-loan week-over-week decline in participation, according to Black Knight, was far and away the largest one-week reduction yet recorded, and a potential sign that many people have been able to shore up their household finances in order to make regular monthly payments. The 4.14 million mortgages receiving some form of relief was the lowest since the end of April. But many loan forbearance plans granted at the beginning of April were due to expire at the end of June. Homeowners were able to extend these plans, and while many people did not, the majority were extended for another three months — suggesting that many of those homeowners experiencing financial hardship in the early spring continue to feel that pain. And as more states decide to either pause or reverse reopening plans – potentially hindering or even reversing the slow recovery in labor markets – it’s possible that participation in these programs will reaccelerate in the coming weeks.

Home construction has been heating up in recent months. After plunging in April, builder confidence has bounced back strongly, and building permits were up 14.4% in May from April (though both confidence and permits are well below year-ago levels). Homebuilders have been spurred into action by an emerging picture of the traditional spring selling months getting pushed back into the summer, and buyer demand buoyed by low mortgage rates and a shortage of existing homes for sale on the market. The increased activity has led to a boom in what some are now dubbing the nation’s hottest commodity: Lumber. The prices of a Random Length Lumber Futures contract is up more than 85% since the beginning of April, to almost $500 per thousand board feet – an all-time high. The public’s increased interest in home improvement projects and the rushed construction of outdoor seating at many restaurants may have also added to the heightened demand, which is threatening to cause a supply shortage. So far, lumber supply shortages have not led to increases in the sale price of new homes, but any change in prices should be expected to materialize a few months from now, once planned projects actually begin breaking ground.

The Federal Reserve announced the Main Street Lending Program in early April to provide direct support to small- and mid-sized businesses, part of a wide array of initiatives aimed at calming markets and aiding the economic recovery. But, despite the enduring struggles of many businesses small and large, very few companies have participated so far, in large part because of a delayed rollout, strict requirements and few borrowing options. In order to mitigate taxpayer risk (something that should not be understated), the program requires lending institutions to assume some of the risk associated with the loan — which may explain why many are seemingly reluctant to get involved. Thousands of banks are eligible to participate in the program but as of last week, only 300 have registered, and Bank of America is the only one of the nation’s large commercial banks to sign up. Businesses looking to participate are also finding it challenging to meet the stringent conditions associated with the loans. The program aims to help businesses that were strong heading into the pandemic, but have since seen revenues decline. But many businesses that were healthy and looking to expand pre-pandemic have too much existing debt to qualify for the loan, leaving them out of luck. Some – including Treasury Secretary Steven Mnuchin – have said that the program can be effective even if nobody uses it, because it could still provide certainty to investors that credit is available if necessary. But tepid participation might also pose a risk: If too few small businesses are able to participate, more firms are likely to fail, leaving people out of work and businesses in need of even more support.

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