Just a few weeks ago, the housing market was poised to take off. Home builders had changed strategy to focus on entry-level homes to serve a growing need in the market. Permits and housing starts were at 10-year highs. Wage growth and unemployment were strong. Interest rates were down to 3.5%, bringing the market back to a level last seen in 2013.
It all lead to a National Association of Home Builders’ Confidence Index of 75 in January, up from 58 the year before. The growing confidence was supported when home buyer traffic index scores rose to levels not seen since 1998, as millennials finally seemed poised to become first-time homeowners after years of waiting.
Millennials finally seemed poised to become first-time homeowners after years of waiting.
Now, it seems as if those days were a lifetime ago. In the weeks since, the coronavirus has become a pandemic. Equity markets have plummeted. U.S. Treasuries, the 10-year being a leading indicator of the 30-year mortgage rate, have whipsawed over the past month, at one point hitting an unheard of .32%.
Housing data typically lags behind the equity and bond markets, but as the February data indicates, not even housing is immune to the coronavirus. Housing starts fell 1.5%, to a seasonally adjusted annual rate of 1,599,000, which is less than anticipated as forecasters projected a 4.3% decline.
It should be noted that the January figure of 1,624,000 represented a 13-year high and was likely to level off. Housing permits, a more volatile figure but also a leading indicator, fell by 5.5% in February after a 9.2% increase in January. This was a steeper decline than the 3.2% drop expected by forecasters.
Forecasters incorrectly assumed that the impact of the coronavirus would be short-lived. But much like the virus itself, the incubation period for negative economic news will be delayed and the havoc wreaked on the public health and economy has yet to peak.
March will be worse as the virus spreads and workers are asked to stay home. Several cities may follow Boston’s lead in suspending construction for 14 days, and potentially longer. Contractors lack the cash surplus to carry payroll for workers on the sideline, and the industry is often one of the first to lay off employees when work slows. Layoffs will happen and the construction industry will not be immune.
All these factors are setting the industry up for a challenging first half of 2020 while it bears the full economic impact of the virus and looks to recover to what only weeks ago looked like a healthy housing market.
