Housing Takes Center Stage

The country’s economy has awakened from its self-imposed slumber

BY PATRICK DUFFY

In the middle of May, when Federal Reserve Chairman Jerome Powell spoke via webcast and then a few days later on “60 Minutes” about current economic issues, he made some important distinctions about this downturn compared to previous ones, and suggested the best path forward. In this case, there has been no runaway inflation to fight, nor an economy-threatening bubble or boom to address – it is simply about limiting the fallout of a novel virus which we are still trying to understand.

Yet as days of an economy deliberately put on ice turned to weeks and months, it’s becoming increasingly clear that a recovery will likely be uneven, bumpy, and surprising in some ways. The complicated nature of the world’s largest economy means that simply turning it on again with some type of switch (also known as a ‘v-shaped recovery’) isn’t that realistic for all sectors, but pent-up demand could certainly help soften the blow for the housing market.

Firstly, the passage of time, which is required to tap down the virus to manageable levels, can also turn short-term liquidity problems into ones of longer-term solvencies for both businesses as well as state and local governments. Secondly, the difficult politics of providing additional fiscal support versus the reality of an exploding national debt needs to be carefully managed to prevent longer-term economic damage. Thirdly, the shift from flattening the curve of new infections to suppressing the virus will undoubtedly create additional frustrations between business owners and public health experts. It will surely be a delicate dance.

At the same time, accompanying this dance will be economic and consumer trends that will likely accelerate or even reverse with less friction to slow them down. To survive and thrive in a post-pandemic world, look for more investments in automation. According to a March report from EY, 41 percent of survey respondents around the world reported speeding up plans to automate their workforces, and Forrester Research is recommending companies to automate as soon as possible in order to retain a competitive advantage. That’s because studies of employment growth after recent recessions have shown that the most robust growth comes not from more staff, but from technology and machines. Add the complexities of social distancing in the workplace to that mix, and automation starts to look even more attractive.

However, if there’s one key lesson from the last few months, it’s that outsourcing the manufacturing of many critical products offshore went a bit too far, so look for pressure from both business customers and political constituents to bring much of that back to the U.S. For the building industry, that could mean more domestic sourcing of everything from light fixtures and cabinets to appliances and flooring, which could put upward pressure on the price of new homes, but also provide some much-needed jobs for the economic recovery to come.

For now, however, the supply side remains constrained, with April building permits down about 20 percent, and housing starts falling about 30 percent from pre-pandemic levels. While these declines are certainly not as sharp as those in other economic sectors such as retail, tourism, and entertainment, it’s difficult to predict the speed at which the full production of home building can resume. Mortgages in forbearance, which rose to just over eight percent total outstanding loans in May, have seemed to stabilize with the arrival of stimulus payments.

On the demand side, customers are not just ready to jump in, but they may also be favoring suburbs and growing towns at the expense of large cities. That’s due not just due to ongoing contagion fears of living in high-density settings, but also due to the growing awareness that working from home – or from anywhere in the world with a decent Internet connection — works a lot better than many bosses once thought possible. While there’s often a disconnection between people’s wishes in the moment and the actions they actually take down the line, the lure of lower housing costs combined with higher acceptance of remote work may be with us even as 2020 becomes a distant memory.

Even as home buyers continue to digest updates on the economy and the virus, they’re actively conducting research online, with Redfin’s Housing Demand Index up over five percent in May versus the first two months of 2020, and Google searches for home buying rebounding even stronger from April. Perhaps more than anything else, COVID-19 has underscored the importance of a safe place to live for all Americans.

Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He can be reached at pduffy@metrointel.com or at 310-666-8288.

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