After tumbling over 18 percent in March, US housing starts plummeted another 30 percent in April to the lowest level since early 2015. The percentage decrease was also the largest since the government began tracking the metric in 1959.
Housing Starts, Permits & Completions
Privately-owned housing starts were down 30.2 percent in April to a seasonally adjusted annual rate (SAAR) of 891,000 units. Single-family starts decreased 25.4 percent to a rate of 650,000 units; starts for the volatile multi-family housing segment plunged 40.5 percent to a rate of 241,000 units.
Privately-owned housing authorizations decreased 20.8 percent to a rate of 1.074 million units in April. Single-family authorizations were down 24.3 percent to a pace of 660,000 units. Privately-owned housing completions were down 8.1 percent to a SAAR of 1.176 million units. Per the US Census Bureau Report, seasonally-adjusted total housing stats by region included:
- Northeast: -43.6 percent (-42.5 percent last month)
- South: -26.0 percent (-21.3 percent last month)
- Midwest: -14.9 percent (-21.5 percent last month)
- West: -43.4 percent (-18.2 percent last month)
Seasonally-adjusted single-family housing starts by region included:
- Northeast: -66.0 percent (-17.5 percent last month)
- South: -15.0 percent (-24.5 percent last month)
- Midwest: -13.3 percent (-25.7 percent last month)
- West: -41.6 percent (+6.1 percent last month)
The 30-year fixed mortgage rate dipped in April from 3.45 to 3.31, the lowest level on record. The NAHB/Wells Fargo Housing Market Index (HMI), which reflects builders’ reactions to the virus-related shutdowns, plunged 42 points in April (to 30), the largest single monthly change in the history of the index. It marks the lowest builder confidence reading since June 2012, and it is also the first time the index has been below 50 since June 2014.
And builders are not alone in their current lack of confidence. “Fewer people are going to be interested in buying a home and committing themselves to years of mortgage payments when they are concerned about their job and income prospects,” said Mark Vitner, a senior economist at Wells Fargo Securities.
Significant Challenges Ahead
As Vitner referenced, new housing demand is tied to employment and unemployment is now at all-time highs. The current unemployment rate is nearing 15 percent (the highest since the Great Depression era) and, while a bulk of those layoffs will be temporary, there will likely be some structural changes going forward that will result in higher monthly unemployment numbers than we have seen the last two years.
Reports are also proliferating of banks and lenders tightening restrictions for new loans. Not only are lenders increasing mortgage rates to reflect higher risk, some are requiring higher credit scores and larger down payments to qualify for loans.
In addition, requests for mortgage forbearance have shot up with the number of unemployed. About 7.3 percent of US mortgages entered forbearance plans in April, providing temporary relief to more than 3.8 million borrowers who have lost income during the coronavirus pandemic. The loans have $841 billion in unpaid principal balance, up almost 12 percent during just the last week of April.
The flood of requests for forbearance is already straining mortgage servicers, but lenders and veterans of the 2008 financial crisis warn the real chaos will start after the pandemic passes; the problem is confusion over what will happen when borrowers have to make up those payments. Part of the confusion stems from the fact that policies for borrowers differ depending on whether their loan is backed by Fannie, Freddie, Ginnie or owned by a private investor.
Housing’s Silver Lining
Lingering effects of this pandemic-driven financial crisis are also looking increasingly probable rather than a well-defined “V”-shaped recovery in the near term. Neel Kashkari, President of the Minneapolis FED, recently said that "The V-shaped recovery is off the table” during a virtual roundtable conversation. As MarketWatch noted, “Kashkari said the recovery would likely be long and drawn out. While there will be a bounce after the worst GDP contraction in the April-June quarter, the economy will be ‘nowhere near back’ to where it was in December 2019, he said.”
There is reason for hope in housing, however, as a separate MarketWatch piece observed: “As stay-at-home orders loosen and the rate of infection improves in many states across the country, home buyers appear to be re-entering the market. Additionally, most of the jobs lost because of the pandemic were in the service sector — and researchers say these workers were less likely to be in the market to buy a home.
“The viral outbreak also could shift buyers’ interests, which could give home builders an opportunity. ‘The silver lining to the cloudy horizon is the fact that a growing number of companies have extended the work from home policies until 2021, which has driven demand for more home space, as buyers look at more affordable housing options, away from expensive urban cores,’ said Danielle Hale, chief economist at Realtor.com.”
What has been a temporary fix to maximize social distancing is likely to turn into a permanent exodus from many densely-populated urban centers. Roughly five percent of New York City’s population (420,000 people) fled their neighborhoods between March 1 and May 1, according to a report by the New York Times. The number is largely made up of wealthy residents who could afford to temporarily move to second homes or relocate altogether. While other parts of the city experienced only slight dips, it’s likely that many of the moves will be permanent.
Technology has also made working from home a reality for many companies over the last three months, and the trend is poised to be a part of the “new normal” going forward. Forbes recently noted that “Google, Microsoft, Morgan Stanley, JPMorgan, Capital One, Zillow, Slack, Amazon, PayPal, Salesforce and other major companies have extended their work-from-home options.”
This trend allows for great mobility as millions of employees are no longer tethered to urban centers to maintain their careers. Rather, they can choose where they want to live while performing work tasks remotely, which will impact both the commercial and residential real estate markets in the coming years. The southeast and southwest regions are poised to see a boom in homebuilding as a result.
Based on current lumber prices, which just hit their highest level in nearly two years, it appears that builders are eager to meet the new demand. Homebuilding stocks have bounced back quickly since bottoming last month and confirm the trend. The iShares U.S. Home Construction ETF (ITB), which tracks the group of securities, is up over 30 percent since the end of April.
Markets are changing quickly in the current environment but those still employed who have been looking to buy a home are poised to make a move in the near-term as prices tumble and mortgage rates hit historic lows. Despite current headwinds, the underpinnings of housing are strong and the outlook for the sector should provide a glimmer of hope in what has been a turbulent 2020.