New Home Market Update
COVID-19, the formal name of the new coronavirus, is disrupting global stock markets, with the potential to spread to both the housing industry and wider economy. Before we let fear get out of control though, we need to step back to truly understand why COVID-19 matters.
The economy has been on a wild ride for the past 18 months. First, we had the trade war, then mortgage rates breached 5%, followed by the conflict with Iran, and now the US economy is grappling with the uncertainty surrounding the coronavirus. Each of the shocks faced some common characteristics, namely a pullback in demand, stock market volatility, and heightened fears of the next recession. Today is no exception.
Also, like the earlier shocks, duration and resiliency are hard to determine in-the-moment. We’ve seen equity analysts very quickly turn from “buy the dip in stocks” to “let’s actually wait this out because it could be a real problem” over the last couple of weeks before regaining some confidence as of late. The same applies to consumers, the lifeblood of the US economy, in that a short pullback in consumer spending is manageable but a longer-term withdrawal could derail growth.
Let’s be clear though, COVID-19’s threat on US soil is still very low. According to the CDC, “At this time, most people in the United States will have little immediate risk of exposure to this virus.” It appears that lack of tangibility on-the-ground is keeping consumer attitudes fairly positive; Google search activity for “when is the next recession” is not spiking as we saw during periods of 2018 and 2019. This is a positive sign for domestic consumer spending.
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 homebuilding 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.
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.
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 for-sale 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.
“We need to be careful not to freak out,” said Tim Sullivan, our Senior Managing Principal of Advisory. “A lot of our clients are looking 3-5 years out. At that point, the fears of COVID-19 will be a distant memory and we’ll be left with the favorable demographic tailwinds.”
There isn’t a pathway to normalcy yet, but we have two things working for us:
So, how worried should you be? Decently so. A negative global economic impact is virtually a given when cities the size of LA and NYC combined are closed in China. Furthermore, China’s economy, the second-largest in the world, was already in a vulnerable state. Closing schools, restaurants, and parts of cities combined with the “do not travel” warning from the U.S. Department of State only exacerbates the problem.
Equally, we’ve been recently calling the US economy ‘resilient but vulnerable’ as it’s brushed off shock after shock over the past 18 months. There is a chance this is a short-term blip. Furthermore, as we’ve learned from past outbreaks, once the number of cases stops increasing and containment appears likely, growth can rebound quickly. The best we can do is to stay informed and communicate the underlying benefits of homeownership to our consumers.
Chief Economist