Over the past two weeks, the new surge in COVID-19 cases has recomplicated American daily life and economic activity. The Trump administration has resumed its daily briefings on COVID-19, and stated that the situation is due to “get worse before it gets better,” while also noting that medical professionals’ information about and treatment methods for the virus have improved over the past several months. Ongoing vaccine trials still prove promising, but for right now “stopping the spread of COVID-19 is the quickest way to get the economy back on track,” says Ali Wolf, chief economist at Meyers Research, in this week's COVID-19 Update webinar.
Existing home closings fell by 11.3% year over year, based on signed contracts from April to May, but rose by a record-breaking 21% on a month-to-month basis. Overall, trends show that June has been stronger than May, while July has been on par with or stronger than June.
Schools reopening will be the “next big hurdle,” Wolf says, as remote learning could lengthen the buying season and drive a need for more space. However, it is not yet clear whether remote learning will benefit or hinder the housing market, given logistical complications and overburdened parents. In some households, according to Wolf, a parent may need to pull away from work or work fewer hours in order to assist a child.
The economy has overall “plateaued,” though performance remains uneven. This has proven particularly difficult for small businesses. According to Bureau of Labor Statistics data, Miami has the strongest concentration of businesses with fewer than 20 employees, followed by New York, Tampa, Fla., and Los Angeles.
Total economic spending has fallen by 12% YOY as of July, though retail sales have begun to rebound slightly, with positive YOY growth in June. Building supplies are among the top-performing retail sectors, with 17% growth year over year.
An unintended consequence is a meteoric rise in lumber demand and prices. This was driven not only by home builders but by restaurants with a need for more outdoor seating and tables, as well as DIYers doing projects at their own homes. In Meyers Research surveys, builders have reported supply shortages and the need to raise home prices in order to offset lumber costs.
A Huge Week for the Economy
At this point, if new stimulus policy is not enacted this week, the expanded government benefits that provide an extra $600 per week in unemployment insurance will expire. Wolf says that it is likely that policymakers will enact an extension until a proper stimulus bill is created, but as of yet nothing is definite.
Wolf warns that if this money is abruptly taken away, people will struggle to buy groceries or pay their bills—including housing, whether that bill is rent or a mortgage payment. As of now, 17.3 million Americans are still on continued claims, with approximately 1 million new initial jobless claims still filed each week. Nevada, Hawaii, and Washington, D.C., have the highest share of continued claims, while Idaho and South Dakota have the lowest. According to JPMorgan Chase research, if these funds expire, spending could fall by nearly 30%—with a disproportionately high impact on low-income earners.
In response to the idea that allowing the money to expire would incentivize people to return to work, Wolf says that, while there will “always be people that will take advantage of the system,” the reasons that people stay on continued claims more broadly include fear of COVID-19, reduced hours, or closed businesses. “I think there’s a lot of things at play here, more than just people taking advantage,” she says.
Shocks and Aftershocks
While the “shock” of COVID-19 on the economy is past, Wolf warns against the coming “aftershocks”—a period where conditions aren’t quite dire, but carry on for an extended time in an unstable state.
Wolf has also noticed—and noted—a rise in pessimism from bank CEOs from the first to the second quarter. “This is not a normal recession,” JPMorgan CEO Jamie Dimon has said. “The recessionary part of this you’re going to see down the road. You will see the effect of this recession. You’re just not going to see it right away because of all the stimulus.”
“I don’t think anybody should leave any bank earnings call this quarter simply feeling like the worst is absolutely behind us,” said Citigroup CEO Michael Corbat in a conversation with analysts. “We don’t want people … simply thinking the world is a great place and it’s a V-shaped recovery.”
With an economic recovery in process, Wolf says the question has become: “Will there be a double-dip recession?” In the event that permanent job losses rise moving into the fall, Wolf anticipates greater struggles to come. For the moment, she still expects a “swoosh”-shaped recovery, in which housing is better positioned to thrive—but a full recovery cannot be expected until COVID-19 is contained.
Home Sales by Market
With mortgage rates still falling to new record lows, pending home sales rose by 18.2% YOY in June, soaring above pre-pandemic levels, according to Zonda and Metrostudy’s New Home Pending Sales Index.
At the regional level, Raleigh, N.C., had the strongest YOY PSI growth at just under 45%, followed by Myrtle Beach, S.C. On a month-over-month basis, Portland, Ore., has had the strongest PSI growth at over 90%, followed by Las Vegas at about 80%.
The new-home market share has risen in many major new home markets on a YOY basis, speaking to a greater number of new-home closings as a percentage of total sales. Wolf says June was “record breaking” for some builders, though July is not expected to bring much new inventory to market.
Real-Time Housing Stats and Trends
Conversions are currently very high in the housing market, according to Meyers Research senior managing principal Tim Sullivan, though some markets report a mismatch between closings and new starts. The move-up and active-adult markets are regaining some strength, and even home sales in COVID hotspots are holding strong.
Forty-nine percent of builders still report that their net contract volume is improving, and 40% report a month-over-month increase in sales momentum. Thirty-nine percent have kept their base prices flat week over week, while 61% have increased prices. Only 5% raised incentives, while 13% report a rise in cancellations. Builder website traffic is flat on a week-over-week basis, but has risen 37% YOY.
As of July 20, 19% of builders are building more speculative inventory than they had originally planned for the year—up from zero builders the week of July 1. The NAHB Housing Market Index shows a sharp rebound in builder confidence across all metrics, including single-family sales and buyer traffic. At the same time, almost half of builders—49%—report experiencing supply disruptions, up from 30% the week of July 1, particularly in appliances.
Entry-level product is selling at an accelerated rate in many markets, particularly Phoenix, Austin, and San Antonio. At the same time, 30% of builders report that their traffic of out-of-state home buyers has increased year over year. Finally, the “rent vs. own” gap has begun to narrow in some major markets, as interest rates have fallen below 3%. In Salt Lake City, Dallas, and Las Vegas, the median rent payment and standardized median single-family existing monthly mortgage payment are currently almost the same.
The COVID-19 Update webinar series will be held on a monthly basis moving forward. The next webinar will be held on Aug. 19 at 11 AM PST/2 PM EST. Click here to register.
This article originally appeared in Builder.
