The residential construction and home improvement industries, which were so promising heading into 2020, now will be among those sectors hardest hit by the coronavirus.
The National Association of Home Builders’ monthly confidence index was in free fall in April, plunging 42 points month over month to a rating of 30 – the largest decline ever in the 30 years of the index. Economists had expected a rating of 55. Readings above 50 indicate rising confidence, while readings below 50 suggest a decline.
The confidence measure had the largest decline ever in the 30 years of the index.
Driving the decrease in residential construction demand are the stay-in-place orders and social distancing mandated as a result of the coronavirus. These public health measures have caused a surge in claims for unemployment insurance, and, in turn, buyer traffic to plummet to a rating of 13, a 43-point drop from February, the association said.
There has historically been a strong inverse correlation between unemployment and housing starts (a leading indicator of the private construction market), with the correlation growing stronger since the Great Recession of 2008-9. Housing starts have continued to fall from the recent highs in January 2020, plunging by 22.3%, to 1,216,000, from February to March, with permits following suit, falling by 6.8%, to 1,353,000, over the same time period.
Despite the fall in housing starts and construction permits, there will most likely not be a significant fall in residential real estate prices as was seen during the Great Recession. Since 2009, the inventory of finished vacant housing units has continued to decrease, with many cities currently operating well under the months of supply average seen in the recession.
On a non-residential building front, starts fell 9% in March, according to Dodge Data & Analtyics. This decrease in starts was driven by a 5% decrease in commercial building starts, a 7% decrease in manufacturing building starts and a 12% increase in institutional building starts.
Institutional buildings had previously posted a significant gain in February because of several large health care facility starts. Demand on the non-residential side is likely to continue to decrease as companies reassess capital expenditure needs to help mitigate declining cash flow resulting from coronavirus.
The full impact of Covid-19 will most likely not be seen until April.
While the demand for both residential and non-residential construction have decrease, the full impact of Covid-19 will most likely not be seen until April. Most of the construction starts in March continued as planned as contractors had already sourced material and labor for the groundbreakings; at the same time, most of the stay-at-home orders were not implemented until the middle to end of March and into April.
Despite the grim news, there are some glimmers of hope. Homebuilders may be indicating that they expect the recovery to be swift in the housing market as the permits, a leading indicator of future development, didn’t fall as dramatically as the housing starts. This should be viewed as cautious optimism, because the time to obtain permits is more burdensome than the cost, and homebuilders are most likely looking not to be caught flat-footed should the market turn around in the summer.
Then there is the possibility that the federal government will approve a significant infrastructure bill as the country looks ahead toward recovery from the outbreak. A stimulus focused on construction would help fuel a quicker recovery. While much of the focus right now is appropriately on slowing the spread of coronavirus, our lawmakers should keep one eye on the future. Passing an infrastructure bill of this magnitude could be the necessary jolt to jumpstart the economy and improve the country’s crumbling infrastructure.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
