Can the housing market resist the coronavirus?
With the news and social media inundated with stories about the coronavirus, it can be difficult to sort the hyperbolic and sometimes hysterical slag from the real facts.
As of this writing, fewer than 200 cases of the virus have been reported in the United States, a country of more than 300 million people.
And yet, stories abound of people stockpiling spam and widespread shortages of face masks and hand sanitizer. “Preppers,” as they’re called, create huge queues at Costco, Walmart, and Target, with their multiple carts overflowing with non-perishable items as if they’re expecting a hurricane sweeping the world.
Although the virus in the United States has not been widespread, the economic effect of news about the virus has already been monumental.
In one of my recent columns, I compared this type of scenario to the butterfly effect. In chaos theory, the butterfly effect refers to the idea that due to the interconnection of all things, a small event can have large effects on a nonlinear dynamic system.
One of the “big effects” that can be attributed to the news of the spread of COVID-19 is the stock market correction we experienced last week.
The loss of confidence in the US stock market is not due to the virus itself but also to massive efforts to contain it in hard-hit countries like China, South Korea, Italy and Iran .
Factory closures and travel moratoria in these countries are affecting global supply chains and fueling public fears around the world, dampening normal consumer activities such as shopping, traveling and attending entertainment. public. China’s PMI collapsed due to containment policies in that country.
How it affects housing in the United States
To understand what this economic tumult means for the US real estate market, we must first turn to the bond markets.
A market correction, defined as a decline of at least 10%, inevitably comes with moves in bond markets as investors sell stocks and put their money in bonds – and that’s what we’ve seen in the past. last week.
News of the spread of COVID-19 helped push the 10-year yield down to the lowest levels on record.
A return of less than 10 years generally translates into lmortgage interest rates, which can stimulate the purchase and refinancing of a home. But when lower mortgage interest rates are combined with a potential economic downturn (dare I say recession, not there yet) the outlook for the United States, the housing market is getting complicated.
In order to assess how the housing market will be affected by COVID-19, we must first look at the market before the outbreak.
Purchase requests have seen five straight weeks of double-digit year-over-year growth between 10% and 17%, as shown in the chart below.
We haven’t seen a growth like this since 2016. Also, new home sales have just come out of the best ratio we’ve had in this expansion and housing permits are at cyclical highs. (See below).
Before the outbreak, other economic data in America also looked good. Regional PMI data, jobless claims and retail sales were all positive, indicating another year of economic expansion. Even Boeing’s delays did not appear to hamper our continued expansion.
In 2020, we expect new and existing home sales to be around 6 million units. So what can we expect when the COVID-19 virus falls into this fertile economic soil? Here are some things to look for that would point to a possible slowdown in the housing market.
First, a market liquidation can reduce the confidence of high income earners, especially those who would need to sell stocks for a down payment.
Unless the news about the virus worsens and the market stays down, the current market correction and individual loss of equity is not large enough to cause the housing market to collapse.
The image of the job has been excellent. But jobless claims are likely to rise sharply if global growth slows with national containment policies limiting normal travel and consumption. The extent and duration of the COVID-19 outbreak will determine whether unemployment rates will rise significantly.
Our regional manufacturing data has improved in recent months. Regional manufacturing is an important component of leading economic indicators (LEIs) and its recent upward movement has led the LEI in a positive direction. This data line is also at the peak of the cycle.
However, if global growth slows and oil prices continue to fall, that data line will go down. The LEI has the potential to drop 4 to 6 months in a row if the spread of the virus weakens the manufacturing sector while increasing jobless claims – two components of major economic indicators. This data line is part of my six-recession red flag pattern, and so far I haven’t raised that flag.
Saint-Louis Financial The stress index, which is above zero when we are in a recession, hit its all-time low in February, as seen below. Expect this index to increase significantly if the duration and scale of the virus outbreak increases in the United States.
If containment policies are implemented here in America as we’ve seen in other countries, then the housing market will take a hit in the short term.
Americans won’t buy houses at the same rate as we do if they’re afraid to go out and mingle with the public. However, scale and duration are critical here. It would be a short-term event, as I believe we should be able to contain this virus in 2020.
Keep in mind, however, that the record expansion of the economy over the past 10.5 years has put us on a good footing to deal with a possible downturn. Our demographics and low mortgage rates are two powerful assets for the housing market and should offset the negative effects of an economic downturn in the near term.
The housing market is strong enough to cope with a short-term impact on global demand.
Where do we go from here?
For now, I recommend focusing on the positives, rather than falling prey to the fantasies of the golden bugs and survivalists. The next six months can produce some terrible economic headlines, but never forget that we are a strong, proud and hardworking people and we will not accept this by lying.
Here are three things we can do as a nation in response to this short-term, albeit horrifying, virus outbreak:
- Institute an instant payroll tax cut to help prepare families for a possible economic downturn and to help cover the additional costs associated with preventing viruses.
- Provide an indefinite emergency aid fund to businesses, self-employed workers, local government agencies and individuals who have incurred costs or financial hardship due to the spread of the virus or containment measures.
- Government funding to pay all medical bills related to COVID-19, including quarantine fees. Free tests for people with symptoms and free vaccines when available.
Notice that I didn’t mention anything about the Federal Reserve reduce the rates of .5% as they did today, it was done on purpose.
It’s time to show the world the true power of King Dollar. I mean, we’ve provided billions of dollars to struggling farmers during this trade war – it’s time to declare war on this virus.
Remember, too, that the world today is much different from what it was when the Spanish flu killed so many people. We have better drugs to fight secondary infections, sophisticated medical protocols to help those who fall ill, and a concerted effort around the world to contain the spread of the virus and create vaccines against it. We can handle it.
Rather than panicking, my recommendation is to wash your hands a lot, stay away from work sick, and take precautions to stay healthy. Remember to enjoy life.