“The world has changed in such a radical and quick fashion,” Tim Sullivan, senior managing principal at Meyers Research, said in his opening remarks to the fourth weekly Meyers Research COVID-19 update webinar, held Wednesday, April 8th.
In the time since last week’s webinar, the District of Columbia, Puerto Rico, and forty-five out of 50 states have come under some kind of stay-at-home order. This accounts for approximately 95% of the U.S. population, or 316 million people. While the effects of distancing measures are starting to show in Italy, Spain and some U.S. metros, Meyers chief economist Ali Wolf cautions that “we can’t just go back to normal,” and that containment is far from over.
While construction has been deemed essential in a majority of states, Wolf revives the question of ethics in continuing site work, and emphasizes the importance of worker safety and compliance. She notes that some news agencies have started reporting on local construction sites that are not practicing social distancing or other safety precautions.
Initial jobless claims have risen 6.6 million in the past week, blowing away estimates that IJCs would match the previous week. (An additional 6.6 million IJCs have been filed over the past week, bringing total unemployment as a result of COVID-19 up to approximately 17 million.)
At the same time, the last month’s nonfarm payroll numbers show a net loss of -700,000 jobs in March 2020, down from a net gain of over 200,000 jobs in February 2020. This one-month loss is equivalent to the ten months of net job losses that led to the Great Recession in 2007-2008. Of the jobs lost, 450,000 were from the leisure and hospitality sector. Construction lost approximately 30,000 jobs; while residential construction payroll has risen 2.2% over the past month, non-residential construction payroll has fallen -10.7% and specialty trade contractors fell -10.2% across both sectors.
A Look at the Positives
Following on these dire numbers, Wolf notes that this is the point where policy should step in to help those in need. As of now, unemployed adults can file for nine-plus months of unemployment insurance, up from six before recent government intervention. While state-level amounts vary, the federal government is providing an additional $600 per week in UI benefits per person until July 31st. (According to JPMorgan Chase Institute data, unemployment benefits can avert up to 74% of the spending drop associated with a job loss.)
The Treasury and Small Business Association have also finalized guidelines on the $350 billion earmarked in the CARES act for small business loans. Businesses with 500 or fewer employees are eligible for the loan, which is sized based on previous businesses expenses. Recipients must not reduce their staff or cut wages, 75% of the loan must go toward payroll costs, and the entire balance of the loan must be spent within eight weeks after receipt. If these conditions are met, the loan is forgiven.
While this is poised to be a boon to the construction industry, Wolf says that banks are struggling to handle volume of requests they are receiving for these loans. “You usually have time to prep for this, but this is immediate, this is happening now,” she says. “And you should expect to see some headaches, but this is a step in the right direction.”
Real Time Housing Stats
According to data from BDX, Google consumer traffic to builder websites has risen 4.4% week over week as of April 4th, marking the second week of increases so far. Over the same period, traffic has fallen 19% year over year.
The average sales rate per community has fallen below two in most markets, according to Zonda’s March data, which represents a significant drop in sales from the previous month. At the same time, contracts have fallen 46% nationwide.
While the vast majority of builders (94%) in Metrostudy’s weekly survey have still kept housing prices flat, this percentage is still down from 97% last week. A growing share are offering incentives on their new homes – 42%, up from the mid-thirties last week – while 41% report a rise in cancellations. Wolf attributes this rising share of cancellations to high unemployment and a drop in consumer confidence.
Of the builders surveyed, the majority – 44% - are moving forward with land and lot acquisitions on a selective basis. Twenty-nine percent have paused land acquisitions, while 16% are moving ahead as planned.
On the resale end, March listings have fallen 15.7% year-over-year nationwide. In the weeks ending on March 21st and 28th, newly listed properties fell by 13.1% and 34% compared with the same week one year before.
Following on last week’s examination of the “alphabet soup” of recession types, Wolf says that she is now anticipating closer to a “U-shaped” recession, which could last up to 16-18 months. Meyers continues to predict negative GDP growth for Q1 2020, followed by -30% GDP growth in Q2 2020, with some positive recovery in Q3 and Q4. Potential Q1 2021 growth estimates fall between 5-8%.
Wolf emphasizes that when the time comes to “restart” the global economy, the transition won’t be as seamless as many assume. “What’s become apparent is… there’s a lot of things that will change along the way,” she says. “What does the restart look like? Do we wear masks? Do we have to be more careful about meeting together in a group?... Will [consumers] have a job, and if they do have a job, will they still think that job is secure?”
Additional considerations include the interplay of the global economy, the debt burden, the spread of rent payments, and damage to supply chains. There is also no knowing, Wolf says, whether COVID-19 may return in the winter “stronger than ever.”
Trends to Watch
Over the past week, Tim Sullivan and the Meyers Research advisory team have observed a number of emerging trends in the housing sector. Some markets are starting to see workers not showing up, and those that do are watched closely and placed under heavy restrictions. Builders are concerned about mortgage struggles, and employment verification has held up some closings in progress. Land prices, long very high, have also yet to fall, and consumer confidence has plummeted since the start of March.
Based on Census Bureau and Bureau of Labor Statistics data from the past several decades, Meyers Resarch has uncovered a very strong negative correlation between the unemployment rate and new housing starts: -.67 correlation since 1990 and -.95 correlation since 2010. If this correlation holds, a surge in the unemployment rate could indicate a steep drop in housing starts – and 77% of builders surveyed by Meyers anticipate a slight or significant decrease in their planned housing starts for 2020.
The nation’s finished vacant unit (MOS) inventory was far lower at the end of 2019 than it was the height of the Great Recession. In real time, weekly quick move-ins are picking up slightly in California. “We really don’t see this as an issue going forward, but we’ll keep monitoring,” Sullivan says. He anticipates that demand for spec inventory could fill in for a lack of resale market housing, but supply and build conditions are still uncertain.
How COVID Could Change Design
Home design, Sullivan says, could undergo some temporary or permanent shifts as a result of COVID-19 and the “uneven” recovery to come.
While no trends are certain yet, the Meyers Research team anticipates a shift in the consumer preferences towards larger spaces and lower density. He advises builders to keep an eye on movement between cities and suburbs, and proposes that manufactured or factory-built housing may be the answer to building larger spaces more affordably.
Cleanliness and safety are expected to become top priorities. This could lead to a shift toward touchless technology, antimicrobial materials, and indoor air quality systems. Light and power infrastructures might expand to support increased virtual activities.
One anticipated consequence is a rise in home office spaces and equipment. Quicker changes include movement towards flexible spaces, such as living spaces taking over larger garages and second bedrooms that can convert into offices. Another possibility is “phone-booth” style work-from-home spaces, where residents can work from home in quiet while still overseeing activity outside the booth from behind a glass door.
In closing, Sullivan provides perspective with reminders of previous downturns and disasters, going back to the recessions of the early 1980s. “The key thing is that we recovered… we have resilience,” he says. “I’ve got a personal hero who has a hell of a perspective on this, Winston Churchill. His take is, “When you find yourself in Hell, keep going.””
The next COVID-19 update will be held on Wednesday, April 15th at 11:00 AM PST / 2:00 PM EST.Read More