In this week’s tenth edition of the Meyers Research COVID-19 update, chief economist Ali Wolf and senior managing principal Tim Sullivan set out to “make sense of a really unusual set of circumstances and economic conditions”, as Sullivan states in his opening words, by examining how conditions have changed in the past week and what those changes could mean for the future.
Since the last COVID-19 Update webinar, Moderna announced “promising” results in the first stage of vaccine testing, which led to a slight rally in the stock market on the same day. The company is hoping to enter Stage 2 soon, and to rush to Stage 3 by July. It is now one of three companies developing and aiming to have a vaccine available by the end of the year.
All 50 states have entered some phase of reopening. Texas has entered phase two, which includes the reopening of gyms and offices. Results from states that opened early are “mixed,” Wolf says, with cases running “flat to decreasing” in most states.
Approximately 8.2% of home loans are now in forbearance, up from 7.9% last week and 7.1% the week before. At the same time, 87.7% of renters have paid their May rent through the week of May 13, with some differences in performance by property type.
Experts are anticipating a change in PPP loans coming soon, including a possible extension of the repayment period. However, businesses are still struggling under the weight of the shutdown. Based on its data, OpenTable predicts that one in four restaurants will “go under.” Uber has cut approximately 6,700 back-office jobs, and intends to close 45 of its offices. Data releases continue to show economic pain across the board, including record breaking drops in production, retail sales, and housing starts.
Retail sales fell by 22% YOY in March 2020, according to the U.S. Census Bureau. While these numbers are stark, Wolf notes that this reflects the “height” of the shutdown, and expects sales to pick back up over time. Almost all brick and mortar retail sales are down for March and April 2020, but building material sales have only fallen 4%, likely due to hardware stores like Home Depot and Lowe’s remaining open. Food and beverage stores and nonstore retailers – including e-commerce – were the only retail sectors to show positive growth.
Wolf emphasizes that retail underperformance could lead to a drop in sales tax collection – which could in turn lead to a shortage of funds for state governments. This is especially expected to impact states with high tax rates, including California and Indiana. Income tax is another revenue source expected to suffer, particularly in Oregon, Maryland, and California. “This is one of the risks that could undercut the recovery,” Wolf says. “We’ve already seen states that have had to cut jobs or services as a result of what’s going on.”
As of May 21st, 38.6 million Americans have filed initial jobless claims as a result of the COVID-19 pandemic. This raises the implied unemployment rate above 26%, or above 8% if adjusted for furloughs. Overall, weekly initial jobless claims have slowly fallen back from their initial spikes, but still remain well into the millions. Wolf notes that for many of the hardest-hit states, initial jobless claims have fallen from their initial peaks, a potential signal that the worst is behind them.
The next step, looking into the future, is to find the markets that will be able to best weather the crisis. According to Metrostudy analysis of data from the University of Chicago, 70% of the U.S. markets with the highest share of jobs that can be done remotely fall into the bottom third for unemployment rates. However, Wolf notes that this is not a definite indicator of resiliency. Remote work is not immune to layoffs, and high-priced real estate in these cities may suffer as proximity is no longer a requirement for many workers.
Housing Trends
According to Mortgage Bankers’ Association data, mortgage applications for new and existing homes have nearly returned to 2019 levels, down just 1.5% for total volume YOY. Based on data from Zonda on currently selling communities, new home sales fell 38% YOY in April 2020, with sales improving over the course of the month and into May. Tampa was the best-performing market by community sales rate, down 11% YOY, followed by Austin and Jacksonville at -23% YOY. Phoenix is the only market that has recorded a positive average sales rate per community.
Google search trends for “should I buy a house?” are continuing to rise to record-breaking highs over the course of the pandemic. According to Wolf, given the opposing forces of low mortgage rates and fear, it would appear that low mortgage rates, as low as 2.75%, are winning out for buyers. First-time buyers make up a majority share of the active buyers in the market, with weekly owner-occupied purchase rate locks trending far above 2019’s numbers. However, Wolf advises that first-time buyers are acting with caution, and may not make compromises as easily.
While a V-shaped recovery is now “a fantasy,” according to Stanley Druckenmiller, Wolf has revised her shape of the recovery to accommodate a sharp slope at the beginning. While the full recovery could take through next year, Wolf believes a snap-back effect could bolster some industries over others.
Real-Time Housing Stats
The next month to month and a half, Tim Sullivan says, will “define the year” for home builders. Many have sold through backlog, and cancellations have become a big concern and focus as shelter-in-place and job losses continue. Affordable product continues to sell well, but underwriting has become more difficult.
In Metrostudy/Meyers’s weekly survey, which draws responses from 30-60% of builders in the top 20 markets, 60% of builder respondents report that their net contract volume has improved over the past week. Based on mid-May results, a majority of builders are planning to build at least 80% of the homes they had initially planned for the start of the year.
Seventy-two percent of builders have kept base prices flat week over week, and 25% have increased their prices. Thirteen percent have increased incentives in the past week, while 16% report an increase in cancellations.
In the past two weeks alone, the share of builders taking action to acquire land or lots has doubled from 12% to 24%. With sales slowing, 60% report they have “just the right” amount of developed lots, while 28% report they will need to replace them.
Trends We Are Watching
In the near future, both Wolf and Sullivan expect office spaces – and office space needs – to change in a major way. “The high-rise, I think, is going to be revamped,” Sullivan says, noting that low-rise offices with direct entry and no elevators might be considered safer. “I don’t believe it’s dead, but it’s going to have to go through some activity.”
At the same time, WeWork has rolled out social distancing arrangements for its communal workspaces. Sullivan believes that the demand for places like WeWork – for a third space to work away from home – is not set to go away, even in these circumstances.
Meyers is set to keep an eye on work from home in the long term, to see how a lack of proximity constraints it will affect employee living trends. Sullivan expects second and third-tier markets to “light up” due to a lower cost of living.
The next COVID-19 Update webinar will take place on May 27, 2020 at 11:00 AM PST / 2:00 PM EST.
