• A crucial housing market statistic has surged 54% in six weeks after bottoming out in early April.
  • Mortgage applications for home purchases, a proxy for homebuyer demand, have achieved a V-shaped recovery.
  • Economists say the strength in the housing market could help support the broader economy.

The U.S. economy may not be able to mount a V-shaped recovery, but a growing number of analysts believe the housing market is on the verge of achieving that mythical feat.

The latest evidence comes from today’s mortgage applications survey, which shows that loan volume for home purchases spiked a seasonally-adjusted 9% for the week ending May 22.

Homebuyer Demand Has Rocketed 54% in 6 Weeks

It was the sixth straight weekly increase in the Mortgage Bankers Association’s Purchase Index. Application volume has surged a ridiculous 54% since bottoming out in early April, and the index – a proxy for homebuyer demand – is currently 9% higher than the same week a year ago.

You’d be hard-pressed to describe this chart as anything but a textbook example of a V-shaped recovery:

It doesn’t get much more V-shaped than this. | Source: Yardeni Research, Data from MBA

Joel Kan, MBA’s associate vice president of economic and industry forecasting, reveals what may be an even more optimistic indicator.

Home purchase application volume isn’t the only metric rallying aggressively. The purchase loan amount has also “increased steadily in recent weeks and is now at its highest level since mid-March.”

That’s likely because falling interest rates have helped keep homeownership affordable, even though tight inventories have kept prices elevated in recent months.

Low interest rates have made homeownership more affordable than in previous years, which has helped spur more demand. | Source: ING

Housing Market Could Drive the Economy Out of Recession – Or Drag It Lower

If these optimistic housing market trends continue, the effects could reverberate throughout the broader economy, which faces more powerful headwinds as it struggles toward a recovery.

ING economist James Knightley believes residential real estate could support growth in employment, as well as retail sales.

He wrote today:

[A] strong housing market will support construction and employment in the sector. Housing transactions are also strongly correlated to retail sales – as people move to a new home they typically also spend more on furniture and home furnishings, garden equipment and as building supplies such as a new paint job and a bit of home improvement.

Still, analysts warn that there’s a lingering threat that could hobble the recovery once inventories rebound and pent-up demand has been sated.

According to Diane Swonk, chief economist at Grant Thornton, a credit crunch in the mortgage market threatens to render the housing market’s positive fundamentals moot.

The housing market won’t have enough fuel to catalyze a broader economic recovery if access to credit remains tight. | Source: Twitter

Plunging interest rates and skyrocketing forbearances have made mortgage lenders incredibly risk-averse. This has led banks to tighten their approval standards, leaving many would-be homebuyers without access to financing.

Mortgage credit availability has dropped 26% since February. One think tank estimates that as many as two-thirds of home loans underwritten in 2019 wouldn’t pass muster in today’s lending climate.

“The tightening of credit conditions on the mortgage market could work as a significant drag on the economy on the other side of the crisis,” Swonk warns. “The result could diminish the role housing has earned as a driver out of the recession this time around.”

This article was edited by Sam Bourgi.