Weathering the Coronavirus Storm
A look at the Impact of COVID-19 on the Housing Industry
Introduction
When the new decade was ushered in, there was considerable anticipation whether this was going to finally be the year when the building industry hit its stride after ten years of languishing in recovery-mode after the housing-induced great recession. After nearly six months in to this new decade, recovery has taken on a whole new meaning. Our country, and the entirety of the world, face the grim realities of surviving, and trying to rebound from a serious public health crisis, the likes of which none of us has experienced in our lifetimes. We’ve experienced unprecedented economic fallout due to the government-mandated virus mitigation efforts to try and fight the spread of the COVID-19 coronavirus. All the ramifications of this pandemic that brought a swift chill across this country with lockdowns, shuttered businesses, stock market swoons, and enough media coverage and press conferences to make your eyes blur, and your ears bleed, will likely take years to fully play out. The resiliency of our country will be on full display. Some will be much harder hit than others when it comes to the collateral damage of COVID-19. That’s the unfortunate reality of a calamity – any calamity. Being one who believes in counting their blessings, the very fact that the construction industry (along with all their many tentacles) was deemed an essential business, allowed us all to forge ahead and try to make the best of a bad situation. Yes, we may have been conducting our duties from a different perch, but at least we were conducting business. We were fortunate, one of the lucky ones, you might say. No one has gotten through this pandemic unscathed but our wounds have been superficial, at least so far. With that as a backdrop, I hope you will take the time to peruse through my latest market report. There are two pieces, the first is a general overview of what has taken place this year, and the second is more specific to the lumber market. We will also forecast what may be on the horizon for the remainder of the year. I realize that any projection is on shaky ground these days, given the accelerated pace change comes at us. The one silver-lining from getting through catastrophic times is that you develop a renewed appreciation of those closest to you. Those you trust the most. Those you respect. Those you love. I feel tremendous gratitude for my work associates at Contract Lumber, our countless vendor partners dedicated to our success, and for our many, many customers who have entrusted us with your business over the years. I am confident that together, we can meet any challenges that come our way.
Welcome 2020
The housing industry came riding into the new decade with the strongest market seen in a long time. We were drastically underbuilt with a 20-year low as measured in number of homes for sale. Mortgage interest rates were trending lower, demographics were foretelling reasonable pent-up demand, and first-time homebuyers were filtering back into the equation. The housing market was humming with housing starts posting their best quarter in over a decade coming out of 2019. Confidence was abundant. January posted the single highest level of residential housing starts since 2007, at 1,617,000 units, seasonal adjusted annual rate (SAAR). February starts were slightly behind the torrid January pace, but single family homes topped 1,000,000 units SAAR for only the second time since the great recession. Northern markets were experiencing a relatively light winter and it was construction activity full-steam ahead. It appeared we were poised for a banner year in residential construction. Game On!
How Quickly Life Can Change
Like most of you, I remember vaguely hearing about the mysterious coronavirus in China in late January. By all the expert accounts, the risks to the American public were deemed very low, so we all went about our business of supplying and building homes, thinking this will not affect me. But by mid-February, the tune had changed. The term pandemic crept into the consciousness of the American public and it now feels like our lives will forever be changed. The WHO even gave it a formal name, reminiscent of naming a hurricane – COVID-19. Things seemed to move quickly, if not haphazardly, after that. Confusion and mixed messages seemed to reign the next few weeks with reports ranging from anybody can get a test, to travel bans, to flawed testing, to failed testing, to should I or shouldn’t I be wearing a mask. We were surrounded by mixed messages it seemed. Finally, on March 13, President Trump declared the coronavirus pandemic to be a national emergency. Three days later we were introduced to the idea of social distancing, and a few days after that, State-Wide stay-at-home orders started to roll across the country. It was a whirlwind, to say the least, the likes of which I hope we never experience again.
Essential Business
The best thing that transpired through this whole mess was that the construction industry was deemed an essential business and we were all allowed to continue our work, albeit with following guidelines to help guard against the spread of COVID-19. It sent many businesses scrambling to decide just how they would move forward amid these uncertain times. We quickly learned that we could do far more than we ever expected under shelter-in-place orders and our new remote working environments. We all adapted, as best we could, to the “new normal.” Chaotic times test one’s resolve and leadership, and I must say that I am both impressed, and proud of the way our organization navigated (and is still navigating) these uncharted waters.
The Initial Toll
With the most stringent government-imposed regulations in place ever, our nation’s economy went into a tailspin. Surging job losses in late March, plunged even further in April, with a record 23 million jobs lost for the month. The level of loss and the unemployment rate are post World War II highs. First quarter GDP growth was -4.8%, the first decline since 2014, and the worst performance since the start of 2009. The second quarter will likely be worse. We were in the midst of a health-crisis induced recession. Home sales, new and existing, tanked, as model homes were shuttered, and showings slowed to a crawl. But, while the sale of new single-family homes dropped by 14% in March, it was far better than the 33% decline some analyst had projected. And April sales saw a slight uptick, although still over 6% off from the previous year’s pace. It was clear that even though construction was allowed to continue in most states, the pandemic was taking a toll on the nation’s housing performance, much like it was in all other sectors. COVID-19 was a gut-punch to consumer sentiment.
Looking for the Bright Spots
The Federal Government took extraordinary steps to help ensure economic stability during the coronavirus pandemic. Congress quickly passed the CARES Act which was signed into law by President Trump in late March. The Coronavirus Aid, Relief, and Economic Security Act, pledged over $2 trillion dollars of economic relief for American workers, families, and small businesses. It was a sweeping package designed to preserve jobs for American industries, and to assist struggling families’ bridge the financial burdens they faced. The Federal Reserve held the federal funds rate near zero and said it intends to keep its benchmark rate there through 2022. The Fed’s message was clear: we will do whatever it takes to return labor markets and the economy to where they were prior to the COVID-19 outbreak. They have also continued their quantitative easing policy, purchasing on a monthly basis $80 billion in treasuries and $40 billion in mortgage backed securities, which is helping to support low mortgage interest rates and housing demand. We fully expect these policy initiatives by the Federal Government to work their way through the system and loosen up credit markets and stimulate economic recovery.
There has been a sideline benefit for the housing industry in having so many people sequestered at home. There has been a newfound importance a home plays in the psyche and security of all Americans during this pandemic. Housing is sure to remain in the forefront of consumer decisions. In addition, it’s reasonable to expect certain long-term changes in housing demand, considering the amount of time people have had to spend in their abode. One unavoidable lesson of the COVID-19 public health crisis is that high-density environments, like central cities, face greater challenges. Many builders already report a renewed interest in moving to medium and low density neighborhoods to replace crowded living conditions and dependency on mass transit. And while I would not expect to see a mass exodus to the suburbs, and beyond, it will become increasingly important for builders to create living environments that will deliver the life and excitement these urbanites strive for. Another trend we will likely see is that home sizes will grow again. Over the past three years, the median new home size has declined, especially as builders add additional entry-level inventory. Homeowners are likely unsatisfied with the limits of their current home space, especially when it must function as a home office, or possibly two. Expect a return to larger square foot homes.
The Light at the End of the Tunnel
In the first concrete sign that we have turned the corner on COVID-19, the labor market surprised nearly everybody with a positive reading in May. The Bureau of Labor Statistics reported the unemployment rate in May declined to 13.3%, well below the 20% rate some analyst forecasted. In the unexpected turnaround, the U.S. added 2.5 million jobs since April, a sure sign that America is getting back to work. In another sign that we are seeing light at the end of the tunnel, the housing industry racked up solid gains with May starts posting a 4.3% increase to 974,000 units (SAAR). Permit data for the month added even more excitement to the mix with both the single-family, and multi-family sectors announcing double-digit increases above April. According to the Bankers Association Builder Application Survey, mortgage applications rose by 26% over April figures, and are running 11% ahead of last May. Builders are reporting that buyer traffic is rising as they continue to ramp up production following pandemic-related restrictions. Expect to see additional near-term strength in coming months from the resumption of delayed sales activity cause by social distancing and stay-at-home orders during March and April.
All-in-all, it feels like home building, and the housing industry in general, wants to takes its rightful position of leading America out of a recession. The recovery will no doubt be littered with challenges. Headwinds include continued high unemployment, stagnant income growth and even possible income reductions, trade disruptions, a collapse in crude oil markets, and an almost certain tumultuous election year. Then, there is the uncertainty in each local building community in areas like land, development, and construction lending, concerns whether delays in terms of project approvals through Planning & Zoning Departments, or delays to the permit approval process, or job-site engineering inspections could drag out progress. And of course, there is the ever present concern over subcontractor availability. But the tailwinds are significant as well. Record low mortgage interest rates will continue to attract value-minded buyers, and home prices have remained remarkably stable over the last four quarters. Demographic data tells us that there is significant pent-up demand of potential new home buyers waiting in the wings. In the Bankers Association Survey, 44% of the market’s rate locks in May were from first-time home buyers. And to help with the move-up market, active listing counts have come back to life in many cities as the stay-at-home orders have lifted.
Undoubtedly, 2020 will forever be etched in our minds as the year of the coronavirus pandemic, and the mitigation efforts that, for all practical purposes, shut down our country. The impact has been, and will continue to be, profound. But, as with any seemingly insurmountable challenge that is eventually overcome, we come away with knowledge in hand, and a great sense of accomplishment. COVID-19 was, and still is, shrouded in uncertainty. It will take everything we have within us to weather the storm. It will demand our hearts, our minds, our collective resolve, our grit, and a level of commitment, the likes we have never had to summon before. I am confident this nation is up for the challenge. I know the housing industry is ready to lead the charge.