“Unlike the past two weeks, where there has been a lot of movement on the economic front, this week what has changed focuses heavily on the containment measures,” Ali Wolf, chief economist, says to open the eighth weekly COVID-19 Update webinar by Meyers Research.
As of last Friday and Monday, Georgia has begun to allow some businesses to reopen – but many businesses are reluctant to reopen at this stage. According to Wolf, the local business community does not want to risk opening too early, citing safety, demand, and reputation as top concerns.
A number of other states have begun to reopen or made plans to do so in the near future; Texas has begun its first phase, reopening at 25% capacity, with Phase Two expected on May 18th. Some construction has been allowed to reopen in Washington state, following very strict guidelines.
Antibody tests conducted in major cities show that an estimated 6% of Los Angeles residents have antibodies against COVID-19, while in New York City nearly 25% of residents have antibodies. Gilead has announced success with therapies for COVID-19, and it is believed that Oxford Group could have a vaccine ready by this year, though how quickly it will become widely available is unknown.
In the housing sector, recent data shows that 91% of renters have paid their rent for April, down from 96% last April. Seven million mortgages are now in forbearance, up from six million last week, and government-sponsored mortgage providers have established they will not require a lump sum when payments are due. Wolf considers May 1st to be an important day to ‘capture the full impact of COVID-19’, as rent and mortgage payments come due for the second time since the start of the crisis.
Due to overwhelming demand, the newest round of PPP funding, set to disburse $310 billion to small businesses in need, suffered a system crash within fifteen minutes of opening for applications. Some businesses unable to receive this funding are opening despite safety concerns.
Over 26 million initial jobless claims have been filed as a result of the COVID-19 pandemic, plus an additional 3.8 million in the past week. This raises the implied unemployment rate to over 20%, or over an estimated 14% if adjusted for furloughs. Wolf notes this is likely an under-representation of the number of people trying to file for unemployment, as many are experiencing difficulties.
According to Meyers Research’s recently released Positive Net Migration report for 2018-2019, Austin, Tex. had the highest net migration out of the nation’s largest metros, followed by Phoenix, Ariz., Las Vegas, Raleigh, N.C., Jacksonville, Fla., Tampa, Fla., Charlotte, N.C., San Antonio, Tex., Tuscon, Ariz., and Nashville. Wolf notes that positive net migration leads to a number of trends that could make markets more resilient: a larger tax base, lower local taxes, better education and public safety, better employment opportunities, and greater housing demand.
Based on an index of migration rates, unemployment claims, labor conditions, policy, and specific COVID-19 market impact, Meyers and Metrostudy have compiled predictions for low-risk markets in the short and long-term, as well as high-risk markets in the short term. Low-risk markets in the short term include Salt Lake City, Minneapolis, and Columbus, Ohio, while long term bets are topped by Austin, Salt Lake City, and Tampa, Fla. High risk markets in the short term include Las Vegas, Los Angeles/OC, Riverside, Calif. and Miami.
Update on Pricing
The rate of home sales decline is slowing, according to the Mortgage Bankers Association’s purchase application index, which stands at -23% YOY – up from -36% two weeks ago. At the same time, in a survey of Realtors, 40% say that COVID-19 has decreased home buyer interest in their markets – still very high, but down from 45% in early April.
When asked if buyers were expecting lower prices during the pandemic, 64% say that they are, and 14% have encountered buyers who expect a price cut of more than 15%. Wolf attributes this expectation to “recency bias”, with how prices dropped during the Great Recession. However, 74% of home sellers have not reduced their home prices, and those who are have generally made cuts of 5% or less.
Given how rigid the resale market has remained, in combination with low foreclosure rates, Meyers considers current conditions to be favorable for the prices of new homes. While Wolf notes an abundance of pent-up demand across demographic indicators, she cautions that affordability issues are still at play, even if professionals believe that the crisis may lead home buyers to want larger spaces with yards.
“Everyone’s always wanted that,” she says. “But there’s been a reason we haven’t seen a flood of people buying, and it’s still ultimately that affordability issue.”
Economic Tug of War
Moving forward, the economy is locked in a state of “tug of war” with the virus, Wolf says, dependent on consumers’ sense of physical and financial security.
While some states are reopening some businesses, consumers may not yet be comfortable visiting them. In a CBS news poll, 48% of respondents said they would not return to public places unless the outbreak was definitively over. Seventy-one percent would not be comfortable at a bar or restaurant, and over 85% would not get on an airplane or attend a large event. Traffic moving through TSA has dropped by 95% YOY, and Wolf predicts airlines – and associated businesses, including tourism and conferences - may not recover until 2021 or 2022.
This “hangover”, as Wolf calls it, is expected to linger for some time to come. Retailers may close stores, and retail spaces may lose tenants. In a recent survey, one-third of CFOs have said they are planning for layoffs, and 70% are deferring or canceling investments. States are expected to lay off staff and limit budgets, and sporting events and large gatherings will not be possible.
In all, first quarter GDP has come in at -4.8%. Meyers is predicting -30% GDP growth for the second quarter, then 5% and 15% for the rest of the year. Wolf retains her previous economic forecast of slow and steady regrowth over the next 16-20 months, assuming the economy reopens in May. Single-family starts are expected to fall 22% for 2020, then rise 5% for 2021.
Real-Time Housing Stats
This week, conversations between builders and the Meyers Research advisory team have revealed a number of developing trends in the market. Spec homes are currently selling better than homes to be built. Municipalities are still working in fits and starts, but builders are reporting that their processes are becoming more streamlined. International buyers have slowed to a trickle, impacting many markets in Florida, California, and Texas. And in Georgia, many model homes are reopening and staffed.
Almost 50% of builders have reported an improvement in sales week over week. Financing remains a challenge, with 41% of builders reporting financing has fallen through for a home under contract.
This week, 88% of builders have kept base prices flat week over week – down from 93% last week – and 9% have said they increased prices. Twenty-five percent have raised incentives, while 21% have reported a rise in cancellations, down 31% from two weeks ago.
Builder online traffic is up 5% week over week, and 8% year over year, according to BDX. According to Tim Sullivan, Meyers senior managing principal, this marks the highest level of online traffic looking for homes ever.
On the land acquisition front, most builders – 54% - are being selective but watching the market closely, Sullivan says. Land owners are generally ready to sell at their price, and capital is generally waiting for land to be repriced. It is unknown which side will move first, but Meyers believes a discount may be required.
Potential pain points in the future may include price reductions, builder layoffs, risk to servicers, and tax increases, which Sullivan considers an oncoming certainty. Hillsburg County, Florida, home to the city of Tampa, has already levied $13,000 in impact fees on the cost of a 2,000 square foot home.
Master-planned communities are considered a “bright spot” in the market moving forward. According to Sullivan, they provide many of the things buyers strive for, new, clean homes with abundant outdoor space, plus developed lots for builders who are less willing to self-develop.
The next COVID-19 Update webinar will take place on May 6, 2020, at 2:00 PM EST / 11:00 AM PST.
