Today’s economy has no playbook, as the COVID-19 pandemic - and our reaction to it - largely controls the path forward. Business leaders acknowledge that we are in a fluid situation, which may need additional course correction at any time. The new COVID-19 economy comes with winners and losers, and housing is one clear beneficiary.
The housing market tanked with the rest of the economy starting in mid-March as we all grappled to understand our new reality. Consumer spending, a critical component of the economy, virtually vanished overnight, and for six to eight weeks home sales were constrained. Experts in the home building industry were working to figure out what was next, all while trying to quiet the murmurs that housing could be hit as hard as it was during the Great Recession.
Then, something surprising happened: early green shoots in the housing market sprouted and continued to grow. Starting in late-April, builders began reporting a steady increase in demand and online traffic week-after-week. The homebuilding industry learned that the increased time at home surfaced flaws in our existing living situations. For example, we became more in-tune to how much flex space we have, the size of our yard, and the space we have to find privacy when the whole family is home.
Where we live was forced on us by the virus as not just shelter but our gym, office, daycare, bar, and sanctuary. With housing as our focal point and a shift to work-from-home lessening the importance of location, home purchases started rolling in. In fact, new residential sales are on-track to post the best year since 2007.
We can chalk today’s housing strength up to five main reasons:
- Pent-up demand. The housing market started 2020 at a feverish pace before the uncertainty that started in mid-March crushed sales across the country, according to Zonda data. Once the initial round of job cuts started to slow, however, consumers rushed back to the market. Builders reported great May sales and a record-breaking June.
- Favorable demographics. First-time buyers were the driving force of the housing market earlier in the year, and after a brief pause are back in full force. These home purchases are fueled by lifestage changes, fear of missing out, low mortgage rates getting buyers off the fence, and increased savings as a result of the shutdowns that can be used towards a down payment. Move-up buyers and Boomers are also active in today’s market.
- Low interest rates overpowering the confidence hit. We have debated since the beginning of March about whether low mortgage rates or low consumer confidence would be a more powerful force in the housing market. Today’s reality gives us the answer: consumers are taking advantage of the purchasing power that comes with the lowest mortgage rates on record.
- Limited resale supply. Statistics show that an already tight supply of resale homes got even tighter during the COVID-19 crisis. Since mid-March, existing homeowners have been reluctant to list their properties at the same time that shoppers with quarantine fatigue are looking to move right away. Home builders are benefiting from this dearth of inventory, especially those that have quick move-in homes available.
- Robust stock market. The stock market is important to housing in two main ways: confidence and capital. Rising equity prices contribute to the wealth effect, even for those that don’t hold stocks. A strong stock market gives us confidence that the economy is doing fine, and that makes us more likely to spend money. In addition, healthy equity prices support both down payment capital and contribute to net worth for stockholders.
The biggest challenge businesses face is acknowledging that today’s trends are not the same as future results. The strengths in the housing and stock markets are at odds with rising COVID-19 hospitalizations and a battered labor market.
Our calculations show that the states that are either pausing or reversing their reopenings represent nearly 50% of the US GDP, which tells us the economy is not in the clear. Some small businesses have already gone under, and we expect to lose many more forever as COVID-19 hurts profitability. Millions of Americans will continue to be out of work for the foreseeable future and it will take years until the labor market has fully recovered.
Our estimates show 20 million people in today’s potential buyer pool, even after adjusting for a 12% unemployment rate and the relative affordability challenges for new homes. Home builders need to capture only a fraction of the total to have a good year, but we must acknowledge there are still risks. A potential foreclosure crisis, fear of losing a job due to a second round of lockdowns, lack of inventory, pent-up demand drying up, and a pullback in government stimulus may still hold back overall sales six to 12 months from now.
The U.S. recession started in February and likely ended in April, representing the shortest and sharpest downturn on record. There is a looming fear that the steady improvement in the economy and the V-shaped recovery in the housing market is unsustainable in the event of a double-dip recession.
Business leaders should continue to watch developments in the economy, COVID-19 hospitalizations, and efficacy of antivirals and vaccines, but also embrace the strength in the market today. We need to reevaluate the risks as new information is available and remember - hope for the best, but prepare for the worst.
