The COVID-19 epidemic has evolved considerably from one week to the next, defying expectations in its impact on daily life and by extension on the housing market. For the near future, keeping up with the pace of real-time events will mean staying as current as possible on housing data, watching the economy closely, and shifting predictions in a highly uncertain environment.
In the second of Meyers Research’s now-weekly COVID-19 webinar updates, “COVID-19 Update: The Housing Market”, chief economist Ali Wolf has laid out the extent of the last week’s changes, as well as their real-time impact on housing, and updated the last week’s forecasts based on actual events.
In the time since Wolf’s last webinar, shelter-in-place orders have taken effect in a number of states, including California, New York and Illinois. In most cases housing and construction are considered “essential” businesses that can stay open during shelter-in place, with Pennsylvania and the city of Boston as notable exceptions. The FDA has also approved a 45-minute test for COVID-19, which may in the near future provide “better insight” on who needs to be isolated and cared for.
In the housing sector, most model homes are open on an appointment-only basis. Certain industry groups, such as the California Association of Realtors, has called on its members to face to face sales activities altogether. Under these conditions, Wolf expects fewer people to put their homes on the market, resulting in lower inventory.
Initial jobless claims have risen 33%, or 60,000, week over week since last week. Given the velocity of layoffs, Wolf forecast an additional 2,250,000 jobless claims in the last week, or eight times more than the week before. (The actual number, released on Thursday, was 3.3 million.) At the same time, a number of services deemed essential – including pharmacies, grocery stores, and delivery services – have vastly expanded their hiring. In Wolf’s view, these openings could ease the sting for workers who have lost their jobs in other sectors, even if they are underemployed in the short term.
According to Wolf, Secretary of the Treasury Steven Mnuchin predicts that up to 25 million people may become unemployed as a result of COVID-19 in the near future, creating a 20% unemployment rate. James Bullard, St. Louis Federal Reserve President, predicts a 30% unemployment rate at the very high end. Meyers Research estimates, meanwhile, place the ultimate unemployment rate between 9% and 15%.
In a survey of over 300 home building division presidents conducted by Meyers Research from Monday-Tuesday, March 23rd-24th, respondents reported that investor purchases had fallen since the start of the pandemic, which has created some opportunity for potential homeowner residents. Delays are expected in government services, as offices that are open are operating with limited staff. Sentiment toward land purchases varies; some are stopping, others extending the terms, still others aggressively buying. Uncertainty about April is high, with potential cancellations top of mind.
Of the builders surveyed, 70% saw on-site traffic fall by 20% or more week over week. Web traffic reports are varied; 30% saw an increase, 20% saw traffic fall flat, and 40% reported a decrease in web traffic. About half say that they are either establishing or enhancing their offerings for virtual tours.
Almost all builders – 93% - have kept base prices flat week over week, demonstrating that prices are holding up so far, unlike the situation in the Great Recession. At the same time, 26% of builders have increased their incentives in order to make sales. Fewer than 20% of respondents have experienced supply chain disruptions attributable to COVID-19, but nearly 80% expect to at some point in time.
A majority of builders – 68% - experienced a week over week decrease in contracts. Twenty-four percent saw no change, while 8% experienced an increase. “I think that’s been a psychological shift, because everyone thought this was just going to be a complete stop,” Wolf said. “And what we have seen is there still is some activity, there are still buyers that are out there.”
The scenarios in Meyers Research’s revised economic forecast remain similar to models from last week – one for a “short recession,” with a swift drop and quick recovery, and one for a “long recession”, which could last through the year.
The short recession case – considered the “base” case by Meyers – predicts 0.5% real GDP growth in the first quarter of 2020, followed by -10% in the second quarter, some negative growth in the third, and positive growth in the fourth. In the long recession case, the first quarter’s 0.5% projected real GDP growth is followed by -16% growth in Q2, without a rebound in the following quarters. The first case scenario – in which negative growth in Q2 is followed by positive growth in Q4 – is consistent with UBS, Goldman Sachs, and J.P. Morgan predictions, though exact numbers vary.
In all, Wolf notes, Case One is the likely outcome if extreme viral containment measures are enacted, the Federal government provides stimulus to Americans directly, testing kits go mainstream, warmer weather slows the growth of the virus (as one theory holds), or a treatment or vaccine is found.
While the $2 trillion stimulus package – which has just passed in the House – equates to 8% of the current $23.6T U.S. national debt, Wolf believes that, in this case, it is vital to make the expense. “In dire times, we just need to get the money flowing, we need to make sure people are making their bills, because that’s the most important thing to keep the economy in this V-shaped recovery,” she says.
Looking to China as a result of what a recovery could look like, Wolf notes that new daily cases of COVID-19 have fallen to zero or close to zero, and an estimated 85% of economic activity outside of Hubei Province has returned.
Wolf makes clear that different markets may feel different impacts from the economic contraction, whether because of high COVID-19 infection risk, recent oil shocks, or concentrations of industries that stalled as a result of sheltering in place, including second homes or resorts. However, there is no market that will be spared the impact – “every part of the economy, every geography, all of us,” she says, will feel it to some extent.
However, the housing market holds certain advantages in this cycle than it did in the last. Finished vacant inventory is 65% lower now than it was in 2009, and the debt-to-capital ratio has improved, with builders having more cash on hand. While Wolf notes a number of companies will struggle over the next few months, “We could not be in a better place as this blows over,” she said. “We entered into this period with more demand than we ever could have imagined. Interest rates were driving interest. People wanted to buy homes. And now that we’re pulling back, we’re taking away from that, but it puts us in a better position moving forward.”
Next week’s update will be hosted on Wednesday, April 1st at 11 AM PST / 2 PM EST.Read More