The NAHB Chairman shares his insight on the effects of the coronavirus outbreak on the housing market
Builder and Developer: The pandemic caused by the coronavirus is affecting all aspects of life for just about everybody. In your eyes, how will COVID-19 affect the homebuilding industry? What are the biggest challenges builders will be facing amidst the coronavirus crisis?
Dean Mon: The last two weeks have seen growing concern and economic stress related to coronavirus mitigation efforts and social distancing. These recommended strategies will continue to place large sections of the U.S. economy on pause for at least the next few weeks — and potentially much longer. Postponed events, cancelled travel plans, and deferred service consumption all represent lost economic activity. With a growing number of individuals altering their work schedules and working from home, construction and manufacturing are experiencing disruptions as well.
For the construction sector, key challenges exist and vital questions remain: To what degree will permit approvals, engineering inspections, and building supply chains continue or be disrupted? Will stimulus policies enable rents and mortgage payments to continue? How will the labor market respond to a national health crisis and social distancing? This is uncharted territory.
In the near-term, builders should prepare for delays in approvals and inspections, check on their sub-contractors and workforce, and watch their cash reserves. Once efforts to mitigate the spread of the coronavirus are relaxed, housing should be set for a rebound, given low mortgage rates, solid builder confidence, and market opportunities for single-family builders.
B&D: In February, estimates indicated a strong quarter for single-family starts. What can we expect for the months ahead for housing starts, and housing in general?
DM: NAHB is forecasting in our baseline model that second quarter GDP growth will be markedly negative, likely posting the worst performance since the third quarter of 2008. Approximately 40% of the economy is on a full or partial pause due to the coronavirus. Assuming that such efforts are successful within an eight-week period (consistent with South Korea’s experience, where data are reliable), we forecast a weak third quarter followed by a rebound at the end of 2020. The unemployment rate will certainly rise in the months ahead from its historically low rate of 3.5%. Furloughs and layoffs are already being announced in heavily impacted sectors.
These factors affect the outlook for housing starts. Construction activity will face significant headwinds in the months ahead given the economic impact of mitigation strategies that are placing the U.S. economy on pause.
However, while this 2020 downturn will be sharp, it may also be short. The economy was in solid shape at the start of 2020, which was particularly true for housing. The March measure of the NAHB/Wells Fargo Housing Market Index showed a healthy sentiment reading of 72, despite a two-point drop from February. The April reading will certainly be lower due to current market conditions. Single-family home construction in February was up almost 7% from an already strong pace in January, as warm weather accelerated 2020 construction activity.
For the economy as a whole, policy help is underway. The Federal Reserve dramatically reduced the federal funds rate to effectively zero, restarted quantitative easing (including for mortgage-backed securities, when the mortgage market signaled some liquidity concerns at the end of last week), and made other policy moves to help ensure the continued operation of the financial system. President Trump and Congress are negotiating an aggressive stimulus bill, perhaps totaling $1 trillion, which is intended to help the economy bridge the gap from March to August.
All things considered, history suggests a robust rebound will follow this significant but temporary shock to the economy.
B&D: As you mentioned, the Federal Reserve recently cut interest rates to near-zero percent in a move to combat a recession. How will the lower mortgage rates impact the sale of homes in these new circumstances?
DM: The move by the Federal Reserve was dramatic. It was aimed at boosting the economy and keeping borrowing costs as low as possible for consumers and businesses. This and other policy changes were needed given the growing economic stress caused by uncertainty and the shutdown of major elements of the economy, particularly in the service sector, that threaten economic growth and labor market conditions.
For housing markets, the purchase of $200 billion of mortgage-backed securities (MBS) was particularly important given the recent rise in mortgage interest rates that signaled a drop in investor ability or desire to purchase agency MBS. The action should help stabilize mortgage rates over the near term, but more purchases of MBS will likely be required.
This was a necessary move by the nation’s central bank, and one that is supportive of housing markets and home builders.
B&D: What advice do you have for professionals in the industry to prepare for the economic impact?
DM: NAHB is closely monitoring this global health crisis and wants to keep our members informed on this rapidly evolving situation. We will continue to provide additional economic analysis on how the crisis could impact housing. We will also update our website, nahb.org, with the latest information and tools for our state and local home builder association partners to help address economic hardship and keep their businesses running during the outbreak.
The Trump administration and Congress are working together to mitigate the impact on small businesses – the backbone of our association – including making low-cost loans available, if necessary.
In the meantime, it’s important to be patient with each other; check on your neighbors, especially the elderly; and remember we are all in this together. We need to stay strong for our families and our communities.