Someone’s already described the moment as noone else ever could.
“Nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and of vigor has met with that understanding and support of the people themselves which is essential to victory. ”
Of course, in his first inaugural address, in the “dark hour” of a global Great Depresssion, FDR’s lead-in to those words are more chiseled into the common vernacular:
“The only thing we have to fear is…fear itself.”
Who and what stops it when we come face-to-face with the moment? Face-to-face with fear itself.
My bet is that it’s you, that’s who.
Here’s what I mean, and how.
First, the facts, and FDR’s word-smithing here is important. He says, “every dark hour.” We’ve had them before. We’ll have them again. And, by the way, an hour, metaphorical as it may be in the FDR sense of the term, assures us of one thing. It begins, it has a middle, and it ends.
So, too will this hour, defined as it is by the emergence, spread, and toll of the novel coronavirus, on people, on homes, communities, businesses, and nations. It has begun; it will find its middle; and it will end.
Perhaps not an hour, but a time no less finite in its own terms.
So, an economy, and a housing market that has been just fine with volatility, and able to roll with the punches of uncertainty through the end of January, has awakened to questions as to its ability to tolerate a body-slam of doubt.
The Fed, of course, acted. Here’s National Association of Home Builders chief economist Robert Dietz on the facts:
Reacting to the growing demand- and supply-side impacts of the coronavirus, the Federal Reserve FOMC today reduced the target range for the federal funds rate by 50 basis points, lowering the target to 1 1/4 and 1 percent. This is the first time since 2008 the FOMC enacted a federal funds rate cut outside of the typical meeting schedule. It was adopted unanimously and just two weeks before their scheduled March meeting. The target rate is now the lowest since late 2017, completely unwinding the rate hikes of 2018.
On the supply-side, disruptions to international trade are the main concerns. For residential construction, these supply-chain issues concern products like lighting, resilient flooring, plumbing fixtures and household appliances, as well as materials like particulate filter face masks used for construction purposes.
On the demand-side, declines in consumer sentiment and expected decreases in economic activity like travel, tourism, conferences and business meeting would depress economic activity mid-year. However, past history suggests that declines in economic activity to black swan events, like natural disasters, are typically followed by a period of rebounding economic growth.
Despite the rate reduction, the Fed noted that the “fundamentals of the U.S. economy remain strong.” However, the Fed’s statement noted that the virus poses “evolving risks to economic activity.”
The Fed’s action was expected but perhaps not to this degree and timing. And the policy change was consistent with recent declines for interest rates in the bond market. These declines should push mortgage interest rates closer to a low 3% average for the 30-year fixed rate mortgage.
A quick interjection here. Facts count. Feelings are not facts. Evidence-based decisions, planning, judgment beat impulse every time. Dietz notes that the Fed monetary moves likely will “push mortgage interest rates closer to a low 3% average.”
From an Animal Spirits viewpoint, the message is perfectly mixed. Because interest rates are likely to go from historically low to lower-than-dirt-cheap, the time may be right now to buy–if you can find a new home at your price range. At the same time, things are looking dire overall, so–as Jim Cramer put it–“I’m really nervous now.”
This is precisely why now, facts matter. And it’s precisely why thought leadership on evidence-based reasoning, planning, and decision-making from the likes of Meyers Research director of economic research Ali Wolf is invaluable. Wolf writes:
POTENTIAL IMPACT ON HOUSING AND ECONOMIC GROWTH
To make sense of the potential impact, here are the key parts of the economy to watch if the threat either gets worse or shows no sign of abating:
Supply Shock- Wider Economy: The supply shock is the most immediate and obvious impact of COVID-19. For example, Apple came out early to say the supply chain disruptions from China would impact revenue. Since then, many factories have reopened, but the concerns are not wholly eliminated. When revenue and growth expectations are revised down, near-term capital expenditures and hiring plans often slow.
Supply Shock- Housing: The home building industry faces some of the same supply chain challenges with inputs of construction such as aluminum, granite, and furniture also getting sourced from Asia.
Demand Shock- Wider Economy: As mentioned earlier, it’s critical to monitor consumer activity. After all, it represents 70% of US gross domestic product, the broadest measure of the economy.
If the threat of the virus increases domestically, restaurants, retailers, concert halls, and other gathering areas could see slower growth.
The stock market is already predicting a reasonable hit to tourism-related sectors like hotels, airlines, cruise lines, and convention centers (Google, Facebook, and Microsoft recently canceled some large events due to the concern).
On the positive side, companies like Amazon, food delivery services, and some biotech firms seem positioned to fare better than other sectors.
Demand Shock- Housing: Mortgage rates are close to record lows, partly fueled by the trends mentioned in this blog. This puts home shoppers in a very unique position where they need to juggle today’s uncertainty with a really favorable monthly mortgage payment. If consumers can look past the uncertainty, the entry-level market will benefit the most from this trend as the monthly payment is of critical importance to this group.
The luxury homebuying market could take a short-term hit based on the wealth effect. High-income individuals are more likely than other segments to have money in the stock market, a segment of the economy that finished last week the worst since 2008. It has since partially rebounded, but shoppers in this segment are aware of the volatility and may decide to wait things out.
Mortgage brokers are experiencing a refinance boom with activity up 150%+ compared to last year. The lock-in effect of today’s low mortgage rates will come into play a few years from now. Some existing homeowners may be in a place to hold their home as a rental property, which will depress housing supply. That provides a huge long-term opportunity for the new-home market. Equally, though, some buyers will be disincentivized from moving because they don’t want to reset their mortgage rate.
Underlying all of these critical and incisive observations? Two take-aways.
- One is this. Facts prepare you and give you a basis for appropriate response to evolving events.
- Two: Timing.
Remember FDR’s phrasing, “every dark hour.” We’ve survived and thrived through them before. We will again.
Much of the turbulence, the “shock,” as Ali and Rob Dietz put it on the demand and supply sides of the housing equation, is timing. Your 2020 may not work out as you’d planned and believed in as recently as four weeks ago.
Still. The good news is that people in housing are used to hard news.
Hard situations are part of the turf for people in new home construction and other parts of this messy world of housing.
So, here are three thoughts for you, assuming that the continuing unfurling of COVID-19 and its impacts will disrupt business as we know it, at least through this “dark hour.”
- Double-down on customer-focus: when you add up both Rob Dietz and Ali Wolf’s insights, the net expectation may be an eventual slow-down in unit activity, despite a lower interest rate blip. Not for nothing, but the minute I see or hear the words “stay calm,” the 250,000-year-old amygdala in me starts barking distress signals to the equally primal hypothalmus, with an almost inevitable outcome that amounts to “be very afraid.” If you can increase your empathy among your current customers as to their needs and urgencies, you win for the long haul.
- Amp up your time for your people: Remember, if you feel anxious about the risks–personal, professional, economic, social–of the novel coronavirus, imagine that going on among all the people you work with. You can help those around you by focusing on the facts, helping them seize agency in feeling amply prepared and relatively confident that we will be able to convert this moment from “retreat to advance,” as we have before.
- Take time for you. On a practical basis, perhaps use any time afforded by a macro slowdown in activity to focus on your family, your well-being, and maybe even have time left over to deal with the fact that vacant developed lots are in really short supply right now, and could use your attention.
So, if you are at all like me, you have difficulty doing what you’re told when you’re told to “calm down.” Try focusing extra effort and attention on those three areas that will reward you, and us all, when we do emerge from this “dark hour.”
