In November’s COVID-19 Update webinar, Zonda chief economist Ali Wolf put forth three conditions outside the housing market that would make builders “feel good” about the future once met: a trusted vaccine, the election resolved, and another fiscal stimulus package. As of now, while the second fiscal stimulus has passed and the election resolved with very little impact on the stock market, Wolf gives the the vaccine conditions a “half-check.” While two vaccines are available and effective, distribution is slower than initially expected.
The headline unemployment rate is currently 6.7%, or 9% given add-on conditions. The recent “backpedaling” of the economy, with nonfarm payroll numbers falling back by 140,000 in the December report, matches Wolf’s fears of a “double-dip” recession. “[Overall,] we had 10 million people working last February that are not working today,” Wolf says. “So that 10 million has become very sticky … and of those 10 million, 37% are long-term unemployed.” While high long-term unemployment is bound to cause some “economic scarring,” ongoing expanded unemployment benefits are expected to soften the blow.
The “K-shaped” recovery is ongoing. Trade, transportation, utilities, and professional and business services continue to gain jobs at a steady rate, while leisure and hospitality lost over 500,000 jobs from November to December alone. It remains the worst-hit sector, down 23.2% since February.
At the metro level, many large markets remain far from recovered, led by Las Vegas with an implied unemployment rate of 12.3% and followed by Los Angeles, New York, and Detroit. On the other end, Nashville, Tennessee, has the lowest unemployment rate of the major metros at 4.4%, followed by Minneapolis, Salt Lake City, and Indianapolis.
In response to the K-shaped recovery, the new stimulus package is “targeted” to the sectors that need them most, including $325 billion in PPP loans for small businesses. The Biden administration has announced work on a third $1.9 trillion stimulus package, but Wolf describes this number as a “starting bid.” It is unknown what this plan will come to in its final form. Wolf emphasizes the importance of “targeting” this aid in order to shore up the recovery.
Already, existing stimulus has “kick-started” the recovery. Both the CARES Act and the recent COVID relief deal led to a surge in checkable deposits; at the same time, revolving credit outstanding has fallen sharply. The “refinance boom” also has allowed consumers to save more than ever, giving them the means to spend elsewhere in the economy—especially as “normal” conditions return.
Housing remains the strongest sector in the entire economy, with new-home sales up 36% year over year as of Dec. 1. New-home order performance remains fractured on a metro-to-metro basis, with Seattle; Portland, Oregon; Orlando, Florida; San Jose, California; and Washington, D.C., down on total sales YOY, despite mostly rising sales rates.
Seattle is the only major market where Zonda’s New Home Pending Sales Index has turned negative, though, as Wolf explains, this is largely a function of short supply. Sacramento, California, has seen the sharpest rise at almost 90%, followed by Columbia, South Carolina, at approximately 65%.
According to Zonda’s division presidents’ survey, 60% of builders reported that demand is “stronger than expected” moving into 2021, while 38% reported that demand is on track with their expectations. This points to a strong start to the year, Wolf says, with all buyer groups—including first-time buyers, move-up, luxury, and retiree buyers—“fully engaged” in the market.
As an aside, Wolf notes that searches for the phrase “wedding ring” have skyrocketed in Google Trends, reaching an all-time high since keyword tracking began in 2004. “Google Trends is not always perfect,” Wolf says, “but we know there were a whole bunch of weddings that went on hold in 2020 that will likely happen in 2021 … and we know more marriages means more housing demand.”
Overall, Zonda’s team feels “good” about the direction of the economy, given the condition of the stock market, record high savings rates, and the impact of the stimulus, among other factors. Risks include the state of the CRE market, affordability, lot supply and cost, and the end of mortgage forbearance.
The State of the Market + Real-Time Housing Stats
Tim Sullivan, senior managing principal at Zonda, is “fairly confident” that the first half of the year will come in strong, with easy comps, low interest rates, new supply hitting the market, and buyers following the “rising tide” of a hot market. However, sometime in the second half of 2021, a number of risks are due to present themselves—including more difficult comps, marginally higher interest rates, affordability issues, and a shift in wallet share from housing to other priorities.
Active listings have fallen to a new low across Zonda’s markets. The active community count has trended downward over the course of 2020, with a wide variance across metro markets—from a flat project count in Las Vegas and Columbus, Ohio, to a -10% shift in active project counts in Texas markets Austin, Houston, and San Antonio, to almost a 30% drop in Virginia Beach, Virginia, Portland, and Seattle.
While builder enthusiasm remains at record highs, housing supply has emerged as a concern, leading to some softening. When asked about their biggest worries in December’s national survey, 61% of builders cited building material costs, 54% said land prices, and half cited gapping out, or running out of lots. By January, almost three-fourths of builders cited building material costs as a major concern, while 62% said land prices and 58% noted running out of lots.
Delivery cycles now are longer than ever, with builders struggling to put enough homes on the ground to keep up with demand, or even with sales. At the same time, 70% of builders reported either a significant or slight increase in contract cancellations. However, Sullivan says, builders often welcome these cancellations because they can put the home back on the market, potentially for a higher price.
The most common base price increases lie between $3,000 and $5,000, but in January the number of price increases of $7,000 or more rose significantly over previous months. At the same time, almost half of builders reported that they are not able to achieve high enough appraisal values on homes with raised prices.
Six percent of builders reported an increase in cancellations month over month. Ninety-four percent of builders raised base prices in mid-January compared with December, and not a single respondent reported increasing incentives. Fifty-nine percent of builders reported interruptions in government services, up from 53% last month. Forty-three percent reported labor shortages, up from 40% last month, while 75% reported supply disruptions, up from 65% in December.
The next COVID-19 Update webinar will be held Feb. 24 at 11 AM PST / 2 PM EST. Click here to register.
