Pollack: Delta blues

The Monday Morning Quarterback
A quick analysis of important economic data released over the last week

By Elliot D. Pollack & Co. | Rose Law Group Reporter

Over the past several weeks, the spread of the Delta variant has impacted investors in the stock market. Those that are risk averse are appraising the likelihood that the variant could derail the economic recovery and curb the rally that is now in effect. The market reacted last week with a rout that saw stocks drop the most since last October. However, stocks ultimately recovered and ended at record levels.

Some market strategists believe the Delta variant poses minimal risk to the economy while others see risk increasing in the near term. The Federal Reserve will hold their monthly policy meeting on July 27th and 28th and investors will look to comments from Chair Jerome Powell on Wednesday on how the Fed will assess the economic recovery, inflation risks, and the future of interest rates.

While Arizona has done a good job at getting the vaccines out to the public, we now have seen seven consecutive days with at least a thousand new cases, the longest streak since March. On Saturday and Sunday there were more than 1,500 new cases. Hospitalizations are on the rise. Those persons not fully vaccinated account for 94% of all hospitalizations and 98% of deaths.

The Delta variant may be a risk to the economic recovery. A number of companies are now considering vaccine mandates and some health care companies like Banner and Honor Health will require all employees to be vaccinated. Some states are also considering mask mandates once again.

Aside from the fact that unvaccinated persons can get sick, there are other risks that are being imposed on the economy by the Delta variant. The most serious risk is that the COVID virus continues to harass the population and we are stuck with it for a long period of time. If this occurs, we could see:

  • Other more dangerous variants evolve, some of which may not be immune to the vaccines.
  • The efficacy of the current vaccines may decline over time which means we need a new round of booster shots for everyone.
  • Those working in the health care industry get burned out from the stress of caring for the COVID patients while protecting their own health.

The longer it takes for us to get to herd immunity, the greater the risk to the economy. Those who are not getting vaccinated are only prolonging the time when we can get back to “normal”.

U.S. Snapshot:

  • The Business Cycle Dating Committee of the National Bureau of Economic Research just released their determination of the dates of the COVID recession. The peak in economic activity occurred in February 2020 and the trough occurred in April 2020, making this the shortest recession on record at two months.
  • Concerns about the Delta variant, and the overall trajectory of the pandemic, are potentially affecting economic growth. While the economy continues to mend, Treasury yields have decreased, and mortgage rates have followed suit (see chart below). Unfortunately, many homebuyers are unable to take advantage of low rates due to low inventory and high prices.
  • Housing production across the U.S. was steady in June, although permit issuance weakened as higher construction costs and other supply limitations are deferring and delaying some construction projects. Overall housing starts increased 6.3% to a seasonally adjusted annual rate of 1.64 million units, according to data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.
  • However, single-family permits fell 6.3% in June, posting declines since March. Multifamily permits (2+ units) declined 2.6% and have been decreasing since April. Weakening permit issuance is a clear impact of higher material costs.

Arizona Snapshot:

Greater Phoenix Housing Market

  • New home permits in June saw a 30.74% increase from last June, logging 2,803 permits for the month versus 2,144 for the same month last year according to RL Brown. For the year to date, permits increased over 39%, climbing from 12,439 to this month’s year to date total of 17,299 permits for the Metro Phoenix area. New home permit activity has remained relatively stable in the range of between 2,500 and 3,000 permits per month since last July.
  • For the year-to-date, new home closings are up only 6.9% versus last year. The large spread between permits and closings is something to keep an eye on and may just be an indication that builders cannot build the homes fast enough for demand. On the other hand, resales are up 24% compared with last June and almost 28% year to date showing a strengthening of the resale market activity. Overall, metro Phoenix’s total home sales for the last four months have settled in the range of 14,000 or so units per month.

Southern Arizona Housing Market

  • Tucson scored the best new-home permit month since May 2007 with 513 permits for the month of June. June permits are 20% above last June and 43% higher for the year-to-date in 2021. So far in 2021, Greater Tucson counted 2,812 permits through June versus 1,963 for the same time last year.
  • The median new-home price rose from $307,558 in June 2020 to $355,920 in June 2021 or an increase of 15.7%. The median resale price over the last year rose from $230,000 in June 2020 to $395,000 in June 2021, a gain of $165,000.

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July 2021