As consumers shelter in place, housing becomes increasingly important
By Patrick Duffy
By the time you read this column in early July, it’s quite possible that regional parts of the U.S. economy will again be curtailed due to flare-ups of the novel coronavirus in areas that re-opened too quickly. It’s also possible that the housing market will continue to ignore these flare-ups, as it has so far managed to adapt surprisingly well to a ‘new normal’ for conducting business while still allowing consumers to take advantage of historically low mortgage rates.
The numbers speak for themselves: As of mid-June, mortgage applications for home purchases rose 21 percent year-on-year to their highest level in 11 years. For new homes alone in May, mortgage applications rose by nearly 11 percent year-on-year, and rebounded by 26 percent from April. Homebuilders have certainly taken notice, with their June sentiment bouncing up 21 points to 58 and the metric for buyer traffic nearly doubling to 43. In May, builders pulled 14.4 percent more permits than in April, although they were still down 8.8 percent year-on-year. Builders also started on 4.3 percent more homes in May versus April, although starts were still down 23.2 percent year-on-year.
Despite their rising sentiment, it’s still understandable that builders are hesitant to match year-ago construction levels since so much uncertainty remains in the air in terms of not just the economy itself, but also in consumer confidence. Although consumers were certainly more confident in early June than they were in April, the University of Michigan’s widely watched Index of Consumer Sentiment was still down by nearly 20 percent from the same period of 2019. Nonetheless, when it comes to buying homes, sentiment seems to be on its own trajectory, with Redfin’s Home Buyer Demand Index up 25 percent during the first week of June over pre-pandemic levels, capping its eighth consecutive week of increases.
Home prices also seem to be holding up well, at least on a national level. Although Redfin’s early June database showed 15 percent fewer listings, asking prices were up nearly ten percent and sales prices were up just over three percent year-on-year. Moreover, despite a drop of nearly 18 percent in existing homes sales tracked by the NAR for the month of April, sales prices still rose 7.4 percent year-on-year.
Although it’s still too early to prove statistically that large numbers of buyers are looking to escape high-priced urban centers along the coasts for lower-density suburbs and smaller cities in the interior of the country, numerous anecdotes do point to this trend accelerating over the last few weeks. While that’s certainly partly due to technology proving that remote work is not only possible but can boost productivity, it’s also due to historically low interest rates making the dream of that single-family home a reality. At the other end of the density spectrum, higher-density condo units in urban areas may face a tougher road ahead until there’s more certainty regarding a vaccine or successful treatment for the coronavirus.
For now, the Federal Reserve remains committed to providing liquidity with its full arsenal of monetary weapons, even if that means snapping up the bonds of specific companies. On the fiscal side of things, there seems to be a reluctance to extend enhanced unemployment benefits past the end of July, especially since in many cases workers may decide it’s safer to stay at home for the same or better money. When Congress does take up this issue later in July, we’ll get a better sense of just what a second stimulus package may look like, and whether or not it makes sense to fund more rounds of payments to businesses and consumers.
When they do meet, Congress should consider a recent study from Harvard-based Opportunity Insights, which estimates that the highest-earning quarter of Americans was responsible for half of the decline in consumption during this pandemic recession, wreaking special havoc on the country’s lower-wage service sector workers. And, while those workers may not necessarily be the first in line to buy homes today, they still require a place to live, and are essential in propping up the country’s vast food, retail, lodging, transportation, logistics, and healthcare industries.
In the short run, that may mean more stimulus payments, but that only works if everyone else does their part. If Americans want the economy to rebound, maintaining common sense practices such as avoiding large crowds, wearing masks and physical distancing from strangers is critical. Any sustained economic rebound will only occur after those who spend the most money feel safe.