The U.S. economy is at a relative standstill right now, paralyzed by the effects of the COVID-19 pandemic. We all know it’s bad, but because of the time lag built into the way economic data is reported, we don’t yet know exactly how bad it is.
Looking at some of the initial data that’s just now trickling in, along with a new study by Clever Real Estate on the economic effects of the pandemic, we get a preliminary picture that’s glum, but not hopeless. In fact, there are even a few bright spots.
How the Pandemic Is Affecting Homebuyers
The uncertainty caused by the pandemic (we still don’t really know if it’s going to last for weeks or a year) has led to many buyers deciding to wait things out. Nearly a third of renters surveyed planned to buy a home in the next 12 months, but those plans are now in flux; just 16% said their homebuying plans haven’t been affected by the COVID-19 situation.
Nearly half (48%) of renters have decided to delay their home search, and another 7% have cancelled their search indefinitely (see chart, below). But not everyone is discouraged: 28% have continued their home searches, but with an eye toward falling prices and potential bargains. Still, that’s only about a quarter of prospective homebuyers who are still looking, and they’re going to be very aggressive at the negotiating table.
That’s a scary prospect for sellers, and the statistics show that a number of them are already responding, with 27% of sellers already having dropped the list price of their home.
How Are Home Sellers Responding?
Seller behavior is, roughly, a mirror image of buyer behavior. Of homeowners surveyed who said they’d planned on selling in the next 12 months, 85% have changed their plans.
As mentioned above, 27% of sellers have already dropped their price. Almost as many (23%) have pulled their listing entirely, and just 15% are proceeding with their original plan. For homeowners who are going ahead with plans to sell their homes, things could be rough with so few buyers out there.
I think we can expect to see a marked uptick in alternative sales methods, with For Sale By Owner (FSBO) sellers using a flat fee MLS service to get their house exposure, or conventional sellers chasing eyeballs by posting on Craigslist or other online portals because selling will be challenging during the pandemic
But there’s a glimmer of hope here: Just 3% of prospective sellers have completely scrapped their plans to sell. The downturn in supply, then, is only temporary. Homes will still be hitting the market; sellers are just waiting out the pandemic.
Taken as a whole, those numbers paint a portrait of a market where supply and demand have both fallen off a cliff. But the housing market isn’t broken, it’s just dormant. Whether that will make it easier to surge back, once things return to some sense of normalcy, remains to be seen. And we’re almost certainly in for more pain before things get better.
The Upshot for Home Builders
A recent report on New Residential Construction from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development shed some much-needed light on how things stand for builders. Like the numbers for buyers and sellers, it's a mixed bag.
Construction starts fell in every region of the U.S. between February and March, with the biggest drop—a staggering 42.5%—in the Northeast.
The seasonally adjusted annual construction start rate in March was 1,216,000 homes, down from 1,564,000 in February. That’s a precipitous 22.3% drop, which is the largest month-over-month decrease since March 1984.
The national rate of housing completions fell, too, with a decrease of 6.1% from February to March. Building permits also fell 6.8% in the same time span. But despite those drops, housing starts and permit rates for March 2020 still exceeded numbers from March 2019. So at least in the early days of the pandemic builders still intend to go forward with new projects.
Experts say that the April numbers are almost certainly going to show a further decline in residential construction, just as buyers and sellers will almost certainly continue their retreat from the market. But again, this recession isn’t the product of a broken economy but rather a paused one. As the weeks pass, the data indicate that demand (and supply, for that matter) isn’t dissipating, it’s just being pent-up. When the economy truly reopens, we could see a huge market resurgence as construction projects get underway, months’ worth of listings hit the market, and buyers return with a vengeance.
Happily, this squares with the projections of many top economists. Morgan Stanley projects a huge drop in GDP for Q2, but only an overall average GDP decline of 5.5% for the entire year. Breaking those numbers down, it means they see a massive resurgence in Q3 and Q4, as the economy normalizes, businesses open back up, and consumers resume normal patterns of consumption.
Things look bad today, but there’s a light at the end of the tunnel.
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