With the onset of the coronavirus, a wave of uncertainty overtook the housing market and brought a swift halt to home sales and home building in March and April. But trends in May and June have shown that housing may be in the midst of a V-shaped recovery.
After falling for three straight months, both housing starts and building permits rose in May to 974,000 and 1.22 million, representing month-over-month gains of 4.3% and 14.4%, respectively. The free fall was swift and the recovery is also looking quick, being driven by three trends: wealth creation and income levels, lack of inventory and increased demand.
The wealth effect
As it relates to wealth, the stock market has improved significantly, with the Nasdaq near all-time highs and the S&P 500 index off less than 10% from its high in February. This wealth has helped to create consumer confidence, which leads to spending on housing.
Housing inventory has declined significantly since its peak in 2010, helping bolster prices.
What’s more, those cities that have a large exposure to technology companies, San Francisco or Seattle), have seen positive trends that will continue as those companies continue to grow.
Additionally, when it comes to income, trends showed that the widespread layoffs have disproportionately affected people earning less than $50,000 a year. People in this income bracket tend to be renters, not buyers, resulting in more muted impact on the residential housing market from these job losses.
The housing market is also not the same as it was before the recession. Housing inventory, when measured in months of supply, has declined significantly since its peak in 2010, leading to price increases in homes.
As months of supply remain suppressed, home buyers are likely not going to see similar bargains to those that were available after the recession.
Last, housing demand has continued its pre-coronavirus trends. The weekly mortgage bankers association purchase index rose to 322.50, a post-recession high, buoyed by low 30-year mortgage rates and a surge in millennials looking for first-time home ownership, especially in the Southeast and Texas.
According to a Meyers Research poll, the top reason for those looking for a new home was that they were looking before the pandemic. The No. 2 and No. 3 reasons appear to be much more coronavirus-driven as the reasons for searching are to get out of renting and to get more space.
Home builders benefiting
The housing market’s V -shaped recovery has been especially good for home builders, specifically those operating in the Southeast and Texas since the trough in mid-April.
The NAHB Market Index for June came in at 58, a record 21-point increase from May.
The NAHB Market Index for June came in at 58, a record 21-point increase from May. More than two-thirds of recent home buyers cited COVID-19 as the reason for purchasing a home now, based on a survey released by John Burns Real Estate Consulting as consumers look for more space in the suburbs.
Further increasing home builder demand is a lack of existing home listings hitting the market. In looking at trends on Realtor.com and Redfin, existing home listings continue to be 25% to 30% below 2019 averages, as owners of existing homes have been reluctant to place their residences on the market. The lack of willingness of existing homeowners to place homes for sale has helped drive growth in the ready-to-occupy new home market.
Sustaining this growth and optimism will depend on a handful of continuing positive trends.
- Housing cannot outperform the market alone. The labor market is beginning to show signs of revival with 2.5 million jobs being added in May. Despite these gains, though, the unemployment rate is still extremely high. The labor market will need to continue to grow to prevent cash flow issues with homeowners which will result in foreclosures and have a negative effect on the housing market.
- A second wave of the coronavirus could stall economic growth. This would lead to cancellations or project delays for home builders.
- Home builders need to continue to build houses within the entry-level grade. This would allow for first-time home buyers to take advantage of programs such as FHA loans.
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