March Housing Starts Tumble

New home construction, known as housing starts, came in at a seasonally adjusted annual rate of 1.22 million, a drop of 22.3% from February figures; single-family starts fell 17.5%. Total housing starts are still 1.4% above last year’s March figures, showing that housing was off to a strong start at the beginning of the month before most states started going into lockdown due to COVID-19. Supply chain disruptions due to lockdowns abroad, lack of workers due to illness or the need for social distancing, and contract cancellations all pose significant hurdles for builders. In a quirk of the data, because it is seasonally adjusted, we expect to see the number of starts appear to increase this Spring when they will actually be collapsing.

Home builder sentiment, as measured by the National Association of Home Builders, came in at 30 for the month of April, diving well into contractionary territory in the biggest monthly drop ever. A score of 50 or above is considered expansionary; February’s index came in at 72, which shows how quickly the drop occurred. The weakest component of the index, traffic of prospective buyers, had been trending in expansionary territory for the last eight months but fell to 13 in April.

Separately, mortgage applications rose during the week ending April 10, due to revived refinancing activity when mortgage rates fell from a temporary spike in the middle of March. Mortgage applications to purchase a home, however, have been declining for the last four weeks as prospective buyers hunkered down. At the same time, lenders started raising minimum credit score requirements and tightening lending policies as they braced for a wave of missed payments and potential defaults. The Mortgage Bankers Association says the number of borrowers who skipped payments in March topped two million. Mortgage servicers have been pressing the Treasury and the Federal Reserve to provide them with temporary liquidity, given the forbearance allowed to homeowners.

Bottom Line
April’s weak consumer activity, heightened uncertainty and nationwide lockdown policies will bring additional blows to the housing market. While the phases of reopening the economy are still being debated, and a vaccine, treatment and mass testing capacities are being worked on, prospective home buyers are waiting for a new normal. Their home purchase needs will still be the same, so we expect the housing market to be one section of the economy that will help pull us out of recession.

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