New home construction, known as housing starts, came in at a seasonally adjusted annual rate of 1.6 million in February, almost 40% higher than this time last year. January figures were revised up to 1.62 million, the highest since December 2006. Builders have been motivated by strong demand and low interest rates to build more homes prior to the busy spring season; mild weather helped. Building permits for single-family homes shot up to one million in February, the first time since May 2007. Now, however, we are facing a pandemic that is crippling movements throughout the country. The housing market will be hit in the pending recession as businesses close their doors and households hunker down, with a looming uncertainty over when things will get back to normal. Low mortgage rates and $1000 checks from the government won’t convince people to make big purchase decisions as fears are setting in.
Home builders’ sentiment slipped slightly in March but still came in higher than this time last year. All components of the index lost ground but the traffic of prospective buyers remained in expansionary territory for the eighth month in a row. Housing sentiment on the buyers’ side, which was captured for the month of February ending February 22, was positive but the number of people who think now is a good time to buy a home, considering low mortgage rates, is slipping. Sentiments from builders and buyers will drop precipitously over the coming months, as the impacts of the pandemic become more clear. As we hope to “flatten the curve” and ensure fewer people are infected, the economic impacts from shutting down will be felt deeply.
The call for social distancing and in some cities, sheltering in place, is creating challenges for realtors and sellers. Prospective buyers are foregoing open houses and showings and instead choosing to do virtual tours or canceling them completely. Meanwhile, mortgage applications for the week ended March 13, when some announcements on social distancing started to come down, slipped 8%, driven by a loss in refinancing of 10%. The week prior, mortgage applications hit 55% while refinances hit almost 79% as the mortgage rate went down to 3.47% for the 30-year; now it is sitting at 3.36%.
The housing supply crunch has been a headline story for much of the last year, but now it will be further exacerbated by would-be sellers choosing not to list their homes at this uncertain time. Realtor.com reported the number of February homes for sale dropped 20%. Some regions reported strong movement and lots of showings before the middle of March, but that will be short-lived as the danger of the virus becomes more evident; we could see curfews or more shelter-in-place orders. Pending home sales grew by almost 6% in January, an indicator that February sales figures could be strong, but not for long.
After the virus crests, when businesses and households begin to resume their operations, the housing market will be a major driver of the economic rebound. Unfortunately, it is hard to forecast when that will be. With fewer homeowners underwater on their mortgages than before the housing bust, the Federal Reserve’s purchasing of $200 billion in mortgage-backed securities, rates remaining at historic lows and the pent-up demand from millennials together will constitute a big economic boost once we are through the woods.
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