As the “curve” of new infections appears to flatten, discussions have shifted toward a potential reopening of the economy in the coming weeks, according to Meyers Research’s fifth weekly COVID-19 Update webinar, held on April 15th, 2020.
Among the many plans coalescing around the country, California has released a plan focused on testing and safety, and Apple and Google are developing a contact tracing app focused on limiting viral spread. “All of the different plans, from the federal government, governors, and health officials about opening the economy say the same thing: the reopening will be slow and stages,” says Ali Wolf, chief economist at Meyers Research. “But the good news for our space is that construction, manufacturing, and early education are the common sectors that keep coming up as the ones that can ramp up work the quickest and the safest.”
What Has Changed?
In the past week, mortgage underwriting standards have tightened significantly. JPMorgan has instituted a new 20% down payment requirement on all loans, as well as a FICO score requirement of 700. The FHA has proposed setting minimum FICO scores up to 660, up from 580 at present.
Two million loans, or 3.74% of all loans, are now in forbearance. As of April 15th, 75% of the funds assigned to small business PPP funds have been assigned, with full assignment expected by the end of that day. Nine new federal policies are set to allocate $2.3 trillion in loans to states, cities, and mid-size businesses of up to 10,000 employees.
JPMorgan and Wells Fargo have reported a precipitous drop in profits, and the International Monetary Fund has made an official comparison of the current situation to the Great Depression. However, consumer sentiment is beginning to turn positive, and in the most “fantastic” economic news, the first rounds of stimulus checks are starting to arrive.
As of April 9th, over 17 million initial jobless claims have been filed as a result of the pandemic. According to Meyers Research estimates, this places the current unemployment rate past the Great Recession rate of 10%, up to an implied unemployment rate of 12-14%. In total, 10% of the workforce has been lost in three weeks. (As of April 16th, over 22 million initial jobless claims have been filed in the past four weeks.)
Regions with high concentrations of job losses and at-risk industries are of especial concern. Nevada is among the hardest-hit by unemployment claims, with 16% of its workforce lost. Florida stands at 5%, though Wolf notes that she is keeping an eye on the state, as its stay at home order was enacted late.
In a National Association of Realtors survey, 90% of Realtors reported some level of decline in buyer interest in their resale markets. While 63% of home shoppers are expecting lower prices during this time, nearly 70% of home sellers have not lowered their prices. Wolf attributes this trend to “recency bias”: buyers expecting prices to plummet as they did during the Recession. In truth, resale home supply has plummeted since the start of the crisis, down 42% from expected levels this time of year.
Consumers and a Timeline
According to data from the Bureau of Economic Research, consumer sentiment has experienced its strongest month-over-month decline in history. Household spending spiked across a majority of sectors just before stay-at-home orders were issued, then collapsed as they took effect.
“How are we supposed to start knowing when we can start coming back?” To answer this question, Wolf puts forward two extremes – the dot-com bubble and the Great Recession – but emphasizes that neither sets a strong precedent for what COVID-19 has become, because it was a sudden shock rather than a deterioration.
As for how consumers will recover, Wolf points to a recent ESPN survey in which 72% of respondents said they would not attend sporting events if they resumed before a COVID-19 vaccine was available. According to current estimates, that vaccine could be more than a year away. “Large gatherings, conferences, concerts, travel, hospitality, I think all of those should expect a long timeframe,” Wolf says.
While housing can avoid some of these issues, fear and concerns about affordability will rule the day until the virus is gone, says Wolf. As of now, Meyers forecasts a 20% drop in new home starts for 2020 compared to 2019, though adjustments to 30-35% are possible.
Real Time Housing Stats
“Every week we’re hearing different things,” Tim Sullivan, senior managing principal of Meyers Research, says of this week’s trends. The “freefall” observed in the past few weeks is starting to stabilize. Mortgage-related issues among consumers are starting to impact closing numbers. Some small builders have been approved for PPP small business loans, and many of Meyers Research’s builder clients are taking this time to re-train and re-position its labor force.
Market status varies widely by region, ranging from rising cancellations in California to some struggles but “high-quality traffic” in the Midwest and Texas. Week over week, 35% of builders saw their sales fall flat. A rising share of builders are reporting a decrease in contracts, up to 44% this week.
Almost all builders (97%) have kept base prices flat week over week, but 30% have reported raising incentives, and 31% report a rise in cancellations. Sullivan notes that some builders are mentioning increasing base prices, with the goal of keeping existing buyers under contract “confident that prices are strong.”
Three-quarters of builders are slowing or pausing spec home construction in order to preserve liquidity. Eighty percent are pausing or pulling back on land acquisition, but Sullivan says that “100% of them are paying attention”, based on conversations in the past week.
Update On The Mortgage Market
Given the struggles in the mortgage market, 50% of builders report that financing falling through has negatively impacted units that are under contract but not yet closed. Mortgage availability has fallen from a 20-year peak just a few weeks ago down to 2015 levels, and it is anticipated to grow weaker as time goes on. Wells Fargo has halted the purchase of jumbo loans, and has begun to require $250,000 in liquid assets as collateral on jumbo loans.
Trends to Watch
Many realtors are finding success with clients by adopting new technology tools at all stages of their sales process, including live videos, e-closing technology, e-signatures, virtual tours and messaging apps. Zillow has observed a 600% increase in the use of 3D home tours on its site over the past 30 days, and BDX has recorded a 12% increase in online building professional traffic week-over-week.
“Make sure your online footprint and what you’re showing is as sharp and up to date as possible,” is the advice Tim Sullivan offers in the face of this data. “Go back to that 3D element of product. Be able to show what’s going on.”
Based on the results of previous recessions and consolidation trends over the past ten years, Sullivan anticipates that the majority of the nation’s home closings will continue to be made by the industry’s largest builders – in short, that the “big will get bigger.” Quick move-ins are trending upward by 2,000 units in a little over two weeks, which Sullivan says is equivalent to “a one-day supply.”
Sullivan closes his section with a look at some of the positive aspects of the big picture – that entities can and will ‘absorb, pivot, and perform’ to meet the challenges ahead. Policy has responded quickly to individual and business need. Ninety-three percent of renters have made their rent payments as a portion of renters who paid in the previous month. Jack Dorsey and Bill and Melinda Gates have committed billions toward COVID-19 relief and vaccine development. East and west coast governors are working on plans for recovery, and “we can see what the next step is,” Sullivan says.
On the building side, home builders have quickly embraced the tech they need in order to keep going. Local buildings are creating plans for safety and sharing them with local officials. Process improvements are in progress between public and private entities, and some estimates say that the industry could end 2020 at 70% to 80% of its original starts and sales goals.
The next COVID-19 Update will be held on Wednesday, April 22nd, 2020 at 11 AM PST / 2 PM EST. Click here to register.