“I want to welcome you to the recovering phase of this recession,” says Ali Wolf, chief economist at Meyers Research, in her introduction to the 11th weekly COVID-19 Update webinar by Meyers Research. “By no means is the crisis over, and we still expect plenty of bumps along the way. But the hope at this point is that the free-fall is behind us, and now we start weighing the opportunities with the outstanding risks and make strategic decisions.”
Existing home sales fell by 18% year over year, according to data released last week. Wolf notes that this percentage measures closings, not contracts—likely homes that were signed in February and March. The Meyers New Home Pending Sales Index has measured a 33% YOY drop in contracts, with an improvement toward the latter half of the month. While the Census has measured only a 6.2% drop, Wolf expects a revision soon.
The Federal Housing Finance Agency has extended its eviction moratorium timeline, but evictions are nontheless “on the table” for some areas now, including Texas and Iowa. Some local jurisdictions are acting independently to keep moratoriums, including Austin. Minnesota and Pennsylvania have also extended their timelines.
Facebook’s new work-from-home policy, which incorporates a “cost of living adjustment” for workers that move more than four hours away from a primary office, provides a “first glance” of the logic companies in high-cost markets may employ for workers looking to move to areas with lower costs of living. Wolf considers this logic important for “edge cities” and surrounding metropolitan areas, including San Diego and Sacramento, which may become commuter locations for their larger neighbors if more companies adopt that policy.
Nearly 40 million people have filed initial jobless claims over the course of the pandemic, bringing the implied unemployment rate “dangerously close” to 30%. Assuming 80% of these claims are from furloughed workers, the adjusted unemployment rate is closer to 9%.
The focus, now, is on how quickly these jobs can come back, Wolf says. Local businesses have begun to reopen in many areas, albeit not to full capacity. The spread of open businesses varies by region; in Jacksonville, Fla., 80% of local businesses are open, while in New York City, only 45% of local businesses are open. However, Wolf warns that capacity limits may affect these businesses’ ability to turn a profit.
On the consumer sentiment side, 73% of Americans surveyed by AP-NORC said they would visit friends and family. Just over half, 54%, said they would get a haircut, and 54% said they would go shopping for non-essential items. From there, fewer than half of respondents shared they would go to a bar or restaurant, travel, or exercise at a gym, all the way down to only 14% of respondents saying they would use public transportation. This, Wolf says, demonstrates that the lifting of restrictions won’t entirely remove consumers’ fears of the virus, but she notes that a sense of safety could unlock pent-up demand from months of shelter in place.
What’s Going On?
As of May 27, the Mortgage Bankers Association’s purchase application index is showing growth above 2019 levels at almost 10%, after falling to a trough near -35% many weeks ago. This forms the “epitome” of a V-shaped recovery for the housing market, separate from wider economic trends.
This V-shaped housing recovery is driven by five factors: the “wealth effect” of the stock market, distribution of job losses, lack of resale inventory, very low mortgage rates, and pent-up demand. Policy, cabin fever, demographics, and an increased number of people working from home are also among the market’s influences.
Looking at the stock market as a gauge of the “wealth effect,” or general net worth, Wolf notes that the S&P 500 was off by more than 20% for nearly 17 days during the pandemic—as compared with nearly 400 trading days during the Great Recession. A similar effect is present on the Nasdaq. Both markets are still below their pre-pandemic peaks, but their recovery appears to be occurring far faster.
While Wolf cautions that household income is not a definite measure of ability to purchase a newly built home, she notes that nearly 50% of those who have experienced loss of income or employment—either for themselves or for a family member—earn less than $50,000 per year. Thirty-two percent earn between $50,000 and $100,000, and 21% earn more than $100,000. (At a 3.25% interest rate with a desired monthly payment of $1,300, Meyers estimates the maximum home price that an individual earning $50,000 could afford is $246,600.)
As far as buyer motivation, 60% of builders report that many of their buyers had already been looking for homes before the pandemic. Motivations related to the pandemic come in a close second, with households having the desire to own or desire for more space among them.
Despite these trends, Wolf says the Meyers Research team is anxious about “another shoe dropping” in any one of a number of ways for the housing market. These include the effects of cancellations, slowing demand, a rise in foreclosures, a potential mortgage meltdown, wider job losses and company closures, retail defaults, or a potential second wave of the virus.
Meyers is presently anticipating a slowdown in housing starts for the third and fourth quarters. In a V-shaped recovery, starts are expected to be off 9% for 2020, with 13% growth in 2021. In a W-shaped recovery, starts are expected to be off 22% for 2020, with 5% growth in 2021.
Real-Time Housing Stats
Based on surveys and conversations with Meyers Research’s builder partners, week-over-week increases are occurring across most markets and most product types. Multiple markets report that “tire kickers” are back—investors or curious passersby—but true model traffic remains strong.
Over half of builders, 62%, report an increase in contracts week over week, up from 60% one week ago but 52% two weeks ago. Based on performance through Memorial Day, 50% of builders believe that they will either meet their original May 2020 goals or even exceed them, up from 36% last week.
Sixty-three percent of builders have kept base prices flat week over week, while 36% have increased prices. Nine percent increased incentives over the same period, and cancellations have leveled off, with only 12% of builders reporting an increase week over week. Land activity has shifted for the week of May 25, with 53% builders moving forward with acquisitions and other activity, returning to their original plans or ramping up activity a little more.
Of the product types, roughly 50% of builders report that entry-level and first move-up homes are top performers, with increased traffic and newly signed contracts. Senior managing principal Tim Sullivan attributes this to “life stage” moves, particularly among Gen X and Y buyers.
Sullivan’s “markets to watch” for strong performance in the post-COVID recovery include Phoenix, which shows positive trends despite ongoing low performance; Tampa, where a large number of builders project they will hit their May plan; and Austin, where demand remains strong, especially among millennials.
While major leisure and hospitality markets are hurting, local builders and regional directors note that builders are still “hovering” and looking for land in Las Vegas and Orlando. The active adult market is considered “dormant,” but not dead, with a revival likely driven by “baby chasers” following their children.
The next COVID-19 Update webinar will take place on June 3 at 11 PST/2 PM EST. The webinar series will be moving to a biweekly schedule in the near future. Click here to register.
