03/31/2020

Viral Economic Stress: Impacts of the Coronavirus

NAHB Chief Economist Robert Dietz provided the following update on Friday, March 27, 2020.

Despite the strong start during the first two months of the year, incoming data are now showing the negative effects of the sudden stop for the economy. There were 3.3 million new jobless claims this week as the service sector shed jobs due to government-imposed social distancing related shutdowns. In the week before, there were only 282,000. This is likely the start of a wave of 5 to 10 million newly unemployed in the coming weeks.

The decline in labor market conditions had an impact on consumer confidence as well. Consumer sentiment, as measured by the University of Michigan, fell from a level of 101 in February to approximately 89 in March, the lowest reading in three years. Sentiment will continue to decline as the economy experiences the ongoing affects of virus mitigation.

However, the stock market gave a vote of confidence to the $2.2 trillion stimulus bill, rising more than 10% for the week. Keep in mind that economic income is about $900 billion a month, so the legislation helps fill the gap from an eight-week pause of the economy (which is the assumption behind the current NAHB forecast). We are estimating significant declines for second quarter GDP, with an additional drop for the third quarter, followed by a rebound in the fourth in our benchmark forecast.

The Federal Reserve's actions — unlimited Quantitative Easing (QE), opening various credit facilities, expanding QE to commercial mortgage-backed securities including multifamily loans — have stabilized credit markets, with the 10-year Treasury near 0.8%. Mortgage interest rates have stabilized at above 3.5%. However, the residential mortgage market needs additional support for mortgage servicers who are projecting large cash shortfalls.

In survey data the NAHB Communications team collected this week, we estimated top recent challenges for builders in the current environment. Buyer traffic was cited by 80% of builders, with half of that total noting a major decline. Material supply issues were also noted. Shortly, we will be surveying the prospects of third-party and virtual construction inspections, and in the April HMI we are exploring builder finance conditions.

In backward looking data, February new home sales were solid. In fact, the January and February new home sales numbers were the best since the Great Recession, and inventory had fallen to a 5 months' supply. The demand is there, leading NAHB to forecast housing will play its traditional role of helping to lead the economy out a recession later in 2020.