In the third of Meyers Research’s weekly COVID-19 webinar updates, “COVID-19 Update: The Housing Market”, chief economist Ali Wolf is joined by Tim Sullivan, senior managing principal, to present market strategies and real-time housing statistics for the coming week.
In the week since Wolf’s last COVID-19 webinar, the anticipated social distancing timeline has been extended through the end of April. (The state of Virginia has enacted a stay-at-home order through June 10th, but has said it will reevaluate that date based on national conditions.) While testing is still hard to come by, Abbott Labs has introduced a five-minute COVID-19 test, and Johnson & Johnson has a lead vaccine candidate, though it may not be available until next year.
While Department of Homeland Security has classified construction activity as “essential”, state jurisdictions may set their own stay-at-home order limits. Michigan and Vermont have joined Pennsylvania with orders that do not exempt construction activity. Washington state and New York, the two states hardest hit by the pandemic, have reversed their earlier exemptions. Wolf notes that some workers in other industries, most notably Amazon and Instacart, have gone on strike for safer working conditions.
“We do know that there’s an ethical debate that comes into play of, do we want people to go into worksites, will they be safe?” Wolf says. “I will give my hats off to John McManus with Builder, he did a fantastic article where he talked through some of the ethics. How do you keep your workers safe, and how do you ensure that you’re not putting people at risk, while also trying to contribute to the economy? There is a balance there, and it does seem that our leaders are quite aware of that and trying to work to benefit the workers.”
The Fed’s unlimited quantitative easing has created some volatility in the mortgage market, which has led to some resistance to creating new mortgages. These include a rise in margin calls and a general fear that borrowers in mortgage-backed securities may not be able to make their payments.
Many consumer loans have been suspended for a period of time, though Wolf notes that said loans will eventually come due. Agency-backed rental communities (43% of communities) can take forbearance on their mortgages if they suspend evictions or rent hikes.
Initial jobless claims rose by a record 3.3 million from March 19th to March 26th, moving the unemployment rate from 3.5% to 5.6% in one week alone. (After the webinar, it was announced that 6.2 million additional IJCs had been filed from March 26th to April 2nd.) This elevated number of IJCs, combined with a significant drop in sales tax and the extension of the income tax deadline, is expected to lead to a state funding squeeze and potentially a rise in taxes.
The $2.2 trillion CARE act has been signed into law, and 80% of Americans are expected to receive a check. The first payments are slated to arrive as soon as April 6th, though it may take eight or more weeks for all checks to be distributed. Wolf notes that a weakness of the policy is that it does not account for the cost of living – a $1,200 payment would barely cover half of rent in the most expensive metro areas.
In a Meyers Research survey that asked what individuals would do with the government stimulus check, the majority of respondents said that they would use it to pay off living expenses. Over 25% said they would put the money into savings, Smaller numbers say would donate the money, use it to maintain their previous lifestyles, or make discretionary purchases.
In her final section, Wolf outlines the three “shapes” a potential recession could take. Right now, she says the economy is in an “I” shape – it has come close to a complete stop. A V-shaped recession, Case 1 in previous webinars, would occur over 8-10 months. This is most likely if COVID-19 cases slow down within a month or two, stimulus checks arrive quickly, and more people remain on payroll than off.
Meyers Research has revised its Case 1 GDP forecast to -3% for Q1, -25% for Q2, +13% for Q3 and +7% for Q4, or -3% for the full year. “The longer this goes on, the less likely this case becomes, but we’re still in the window of opportunity,” Wolf says.
The longer the COVID-19 situation continues, the more likely a U-shaped recession, or Case 2, could extend over 18 months. This could result in delayed payments coming due and piling up, people and cities taking on debt to survive, changes in consumer behavior based on mental scars, housing qualification issues, and failing small businesses. An L-shape, considered very unlikely, could extend for years and years and involves debt that gets harder to pay back, liquidity and credit traps, and failure of policy to boost growth.
Overall, Wolf emphasizes that the weeks ahead will be critical to determining the shape of what lies ahead. “I’m still at a point where I’m going to have to say, this will change,” she says.
In the current housing market, Tim Sullivan notes that home sales are ongoing, supported by the current pipeline. However, as he says, “the pipeline isn’t forever.” Fewer new and resale homes are coming online, and cancellations are starting to rise.
Based on BDX’s Google National Consumer Traffic Index, home builder consumer traffic has fallen 21% year-over-year as of March 28th. However, traffic has risen 12% week over week – which Sullivan owes to home builders strengthening their virtual presence in the wake of the crisis.
Sixty-four percent of builders surveyed reported a decrease in contract sales, while 25% have reported that contracts are flat. Almost all builders – 97% had kept base prices flat week over week, though 33% increased their incentives over the same period. Sullivan attributes this price stability to ongoing sales from qualified buyers, and expects prices to soften in the weeks ahead.
While 95% of builders have not had to do furloughs or layoffs, 50% have experienced some kind of government service disruptions – including permitting and inspections.
Based on conversations with industry leaders and the Meyers Research advisory team, Sullivan presents three points of advice for the short term: Preserve liquidity; Generate trust, new action, and new business; and Reinvent or pivot your practices around the current environment. In particular, he highlights the need for online shopping tools for builders: “The virtual element is inescapable now. It used to be pretty cool, and everybody was moving towards it. Now, it’s irrefutable, and absolutely required.”
Sullivan also highlights two “bright spots” in the future of home building – the prefabricated home building market, and single-family homes for-rent or built-to-rent.
“The time is now, in the context of affordability,” he says. “We look at the [SFR/BTR] space as increasingly viable as we start to recover. It has everything to do with flexibility, that you don’t have to have a down payment… and as we think as we look back in a year, two years, three years, to how we come out of this, and we can track the product that helped us get there, we think these spaces absolutely have to do with it.”
Next week’s update will be hosted on Wednesday, April 8th at 11 AM PST / 2 PM EST.
