Jumbo Problems

July 23, 2020

There are so many things to write about and nothing good to say, but the facts are the facts and the implications may well prove to be difficult. For those that pull in their horns, there is a good chance that the repercussions of the current crisis may not be too uncomfortable.

The best place to start is a review of the same data that has been at the heart of the problem. The COVID crisis is raging across the US and other parts of the world, and that is affecting employment and business continuity. After a brief dip (probably related to the current president ordering data to go to HHS instead of the CDC), the data has returned to a statistically rational course. Here is the latest data on new COVID cases in the US from the Bloomberg website.

New Daily Cases in the US at July 23, 2020

As most people know, the US is now the epicenter of the COVID-19 virus. While it would be fantastic to think that the US is the only problem, that’s not the case. Cases around the world are growing rapidly and the virus may truly be out of control. There are plenty of caveats related to vaccines, immunity, and other factors, but for the foreseeable future, many countries will be seeing the effects of the virus for a long time.

Worldwide Daily Cases at July 23, 2020 are still growing rapidly

The effect of this is that economic activity is constrained. The US reported their initial and continuing claims for unemployment this morning and those seeking and continuing unemployment benefits are ticking back up. This is likely due to renewed shut downs, but it is may also be a reflection of changes in hiring and business activity with larger employers. Microsoft, LinkedIn, HP, Boeing, GE, various airlines and more.

The chart below shows continuing claims for unemployment. It is still nearly three times worse than the worst of the 2009 downturn/Great Recession. As can be seen by the red line on the chart (the S&P 500) none of that is showing up in equity prices.

Continuing Claims for Unemployment in the US

Yet the real economy is showing signs of strain, not just in unemployment numbers, also in things like real estate. In both the US and Canada, real estate has been generally stable, with Government programs and some financial institutions assisting those renting and owning with eviction freezes, rent and mortgage abatement programs, deferrals of various costs and of course unemployment programs, real estate prices have not been a major factor in capital markets.

There is some evidence that is about to change. In the US larger homes are frequently purchased with so called ‘jumbo mortgages’ and in most places that is a loan of more than $510,400. Many banks stopped taking on jumbo loans back in April and that is causing problems for those needing to refinance a home (as well as liquidity problems for some mortgage lenders).

A Marketwatch story this morning suggested that the high end housing market in the US is about to get hit hard, with the number of people making mortgage payments in the US dropping rapidly. According to Black Knight Financial Services who provide data in this area, 11.8% of all jumbo loans were in forebearance as of June 16. It is thought that as close to 50% of those were self-employed and may have been hit hard by the COVID crisis.

There is further evidence of difficulties in the housing market in places like New York where rental prices in the financial district are down 40% and sale prices near downtown are down 20-30%.

While there is a sharp rebound in activity in both Canada and the US, it is apparent that there is mobility out of downtown core and densely populated areas to less populated areas such as the countryside or into, at least, single family dwellings.

With increasing layoffs, a decline in earnings and income, it is hard to decipher the causes and effects of all the variables, but the problems with rent, mortgages and employment suggest that the Jumbo problem is not just one with mortgages. In the coming months as the effects of COVID-19 disperse through the economy, there is a high probability that loss of income will wreak havoc on the real estate market and this will bleed into financial institutions.

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