The housing market is still showing strong performance at the start of July, with purchase applications up 33% over the previous week, according to the most recent Mortgage Bankers Association purchase loan applications report. Among the many factors at play in this trend, mortgage rates have fallen to record lows—down below 3% in some loan types. This in turn has boosted the stock market, which is on a positive trajectory. The personal savings rate remains high in May at 23%, though consumer spending is slowly on the rise.
However, in the past two weeks, there has been “mixed and not necessarily good news coming out on the COVID front,” says Ali Wolf, chief economist at Meyers Research. Hospitalizations are rising in many areas, with ICUs again approaching capacity. The “unfortunate and predictable” outcome has been reopening rollbacks; 36% of states have either paused or reversed their reopening plans in response to new case levels. Wolf notes that the states that have paused represent 14% of the nation’s GDP, while the ones that have reversed represent another 35%.
The economy added 4.8 million jobs in June, according to the most recent nonfarm payroll report, though total employment still falls far below pre-pandemic levels. Notably, the data’s sample period is the week of June 14, when cases still appeared to be declining nationwide, and that recent events—including reversals of reopenings and increased concern about the virus—could affect employment conditions moving forward. Wolf predicts that gains will continue, though likely not to the same levels seen in the June report.
One-third of the jobs lost during the early stages of the pandemic have returned, and the construction sector has recovered the most job losses in May and June out of any employment sector at 56%. The unemployment rate is “moving in the right direction,” at a headline rate of 11%, down from almost 15% at its peak. This, Wolf says, takes the rate out of depression levels and into recession levels, with a continuing decline as a best-case scenario.
Based on May’s actual unemployment data at the local level, Meyers Research has calculated an implied unemployment rate for the nation’s major metros for June. Las Vegas tops the list at an implied unemployment rate of 24.3%, down from 29% actual unemployment in May, while Phoenix is at the bottom at 5.4%, down from 8.3% in May. Overall, Meyers anticipates a reversal in the unemployment rate, with declines apparent in major markets.
Initial jobless claims continue to decline, but remain above 1 million claims this week for the 15th week in a row. Continued claims stand at 19.3 million.
What Does the Long-Term Recovery Look Like?
“The first thing we have to acknowledge is that the economy is damaged,” Wolf says. Despite current successes in the housing market, she notes many of the sectors that are suffering will directly affect how the housing industry operates, with lingering effects expected for some time to come.
Month-over-month real estate delinquency rates are up drastically overall, driven by delinquencies in the office and retail spaces. (Industrial, lodging, and multifamily delinquencies are up only slightly.) TSA passenger travel, still down over 60% YOY, has risen steadily from May to July, with a sharp drop near the end of June as cases began to rise. United Airlines has announced that it may furlough 36,000 staff members, owing to a lack of demand or aid funding.
This lack of travel has ripple effects on revenue streams for dozens of other industries and institutions, as well as smaller enterprises that depend on these industries as venues for their sales. These include conferences, county fairs, concerts, award shows, marathons, sports, large-scale weddings, Broadway shows, and college football.
At this stage, Wolf would consider a V-shaped recovery in the jobs market “remarkable” but highly unlikely, with too many market sectors in pain for a recovery to be universal. According to San Francisco Federal Reserve president Mary C. Daly’s estimates, if the virus were to “come under control” now, the jobs market may take up to four years to recover.
The ongoing strong performance of the housing market despite these conditions can be owed not only to low mortgage rates, but to a strong hypothetical buyer pool. Even in current conditions, Wolf estimates that there are approximately 6.7 million households eligible to buy new homes, plus an additional 12.7 million existing homeowners in a position to buy new. By comparison, a “good year” for the housing market is 600,000 seasonally adjusted annual sales. According to this estimate, builders need only capture 3% of the hypothetical buyer pool in order to have a good year.
Housing Stats and Trends
June was “powerful” and “strong” for many builders, says Meyers senior managing principal Tim Sullivan. In particular, Taylor Morrison, BUILDER Magazine’s 2020 Builder of the Year, saw a 94% YOY increase in sales and record per community sales.
Forty-four percent of builders still report that their net contract volume is improving—down from previous weeks but still strong. (Note that this week’s data includes the Fourth of July weekend.) Thirty-six percent of builders say they kept base prices flat week over week, while 63% report they increased prices. Six percent say they increased incentives, and 6% report an increase in cancellations.
The majority of builders—80%—report they either made their planned contract sales numbers for 2020 or exceeded them. Seventy-one percent report that sales rose month over month in June, and 78% report YOY growth. Roughly one-quarter anticipates starting more homes than they had initially planned.
The land acquisition market has changed significantly, with 97% of builders moving forward with land acquisitions. Thirty-one percent are selectively moving forward with planned acquisitions, while 35% are moving forward with all planned acquisitions and 44% are seeking new deals. In many areas, builders are “burning through” their current products, selling homes faster than they can replace them.
For the most part, builders do not report supply disruptions, though a few have experienced difficulties with appliances, and at least one major builder is pre-buying supplies in anticipation of future interruptions.
As ever, performance is uneven from metro to metro. A number of cities are reporting record percentages of projects with price increases, led by Phoenix, Las Vegas, and Denver, where over 60% of projects have increased their prices. On the opposite end, over 30% of New York metro area projects have experienced price decreases.
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