Impact of COVID-19 on the Housing Markets – Part 3

This post is Part 3 of a multi-part series on the impacts of COVID-19 on the Housing Markets. In Part 1, I laid the foundation for what we see in the different phases of the typical economic cycle for the housing markets.

In Part 2, we discussed the factors impacting the market today. For context, this was written in August 2020. As we covered in Part 1, pricing is a function of supply and demand.

Today, we will focus on what we expect to see happen to demand for housing as we progress through this COVID-19 pandemic toward vaccinations and people becoming more comfortable returning to being fully engaged in the economy as well as how government financial support for individuals will impact demand.

Remember that we determined that we should be trying to determine where the housing market is going and preparing for that next phase of the market, not focusing on what’s happening during the summer of 2020.

In making that assessment, we argued that once the government stops providing financial support for people and allows the economic forces to play out, evictions to proceed, foreclosures to proceed, and banks sell off real estate, then and only then will we see the full extent of the impacts to the housing markets by the recessionary forces caused by COVID-19.

Income Stability of Buyers
When we are assessing the impact on the demand side of the equation, we really have to look at the income stability of the buyer pool. Back on July 30, we started a series of posts discussing the how we determine which cities are the best for investing in residential housing. In the first post in the series, we talked about the MOST important data statistics we look at. Those data points are population growth, job growth and income growth. Job growth leads to income stability. Job growth leads to population growth. Income growth confirms and reinforces the economic stability of a city, leading to the desirability of a city to live in. Population growth is also one of the ultimate drivers of housing rents and prices.

Consumer’s income and future perception of income can have a dramatic effect on housing prices. Higher unemployment, low or stagnant wages, or greater uncertainty of future employment all impact buyers ability or willingness to commit to housing purchases.

So, income stability is very important to the demand side of the equation.

Income stability will be significantly impacted by higher unemployment and foreclosure and evictions. We think we can expect unemployment of approximately 20 million people over the next few years. This number will create enormous headwinds for the housing market as individuals cannot or are very cautious about buying new homes. We have used the Economic Policy Institute for data to support our analysis. They have analysts and economists that dig into economic data and try to predict forward what could happen.

This unemployment number of approximately 20 million is four times higher than the total unemployed as of February 2020. We got to this number through the following math:

  • 6.6 million workers were already out of the labor force and not looking for work
  • 21 million Americans currently receiving some type of unemployment assistance as of July
  • 4.9 million (approximately) will not return to work –
    • per “Nearly 11% of the workforce is out of work with no reasonable chance of getting called back to a prior job”
    • this takes into account all those who are out of work

So, there are close to 27 million Americans out of work and at reasonable estimates of around 11.5 million that won’t go back to work after the economy fully re-opens.

We think most of the pain in the housing market has been postponed by the government. The CARES Act and other legislation has provided three main temporary benefits:

  • The PPP was designed to keep employees at work for a 90-day period. That has expired.
  • The additional $600 per week of unemployment benefits was designed to give people extra money during a period of unemployment when there was no reasonable chance of finding other work. This expired by the end of July.
  • The forbearance programs designed to allow people to stay in the residences until they got back to work. This is a longer program; usually about six months.

We all know by now that the virus is still around, a majority of people are still too afraid to return to being fully engaged in the economy and that many types of businesses are still restricted from operating at 100% due to government safety restrictions.

In August 2020, we are still waiting to see if Congress will provide more assistance. We think this is likely because of the elections in less than three months. The bureaucrats are unlikely to not give some additional benefits when they are trying to get re-elected.

So. the estimates above are that when the economy fully re-opens, roughly 60% will go back to work and hopefully that can get up to 70% within a reasonable time period.

However, this still leaves unemployment at a very high level. This will force people to make some very hard decisions, such as:

  • close their business
  • take lower paying jobs or pay cuts
  • move to lower rent properties
  • sell their house and rent
  • millions will cut spending, especially on real estate

Due to these hard decisions, there are estimates that approximately 30% of businesses will go out of business and not return leading to more unemployment.

At some point, evictions will have to be allowed to proceed and forbearance programs will end leading to increased foreclosures. The government postponements and the additional support benefits will eventually end and that is when evictions, foreclosures and the hard decisions listed above will take place.

So, how will all of this affect demand for housing?

The unemployment number will be further impacted because of the expiration of the government programs listed above and currently mitigating the full impact of the economic stress caused by Covid-19.

  • The Payroll Protection Program (PPP) was targeted to run until September and already, many companies including airlines are anticipating laying off workers once this expires, and
  • The end or reduction of Unemployment Insurance of $600 from the Federal Government. This program is currently in open negotiations in the Congress, but appears subject to ending or significant reduction in benefits going forward.

When people are unemployed, they are not in the market for new housing.
When people are taking pay cuts, they are not in the market for new housing.
When people are selling to start renting, they are not in the market for new housing.
When people are moving to lower rent properties, they are not in the market for new housing.

All of these factors will reduce demand and lead to lower overall pricing in the housing market.
I would also add that when people that can afford to buy see prices dropping due to low demand, they are more likely to postpone buying a new house to see if they can wait and get in at a lower price..

Whether you believe these numbers and predictions of unemployment are too high or too low is not really important. The important thing here is that there will be significantly higher unemployment (more millions of job seekers than in recent years) for the foreseeable future and this will create instability in the income picture for millions and millions of Americans.

The United States is facing a wave of foreclosures and evictions as government relief payments and legal protections run out for millions of out-of-work Americans who have little financial cushion and few choices when looking for new housing.

We believe this will peak in 2021. Historically these recession and recovery phases of the real estate market can last for a few years. Recall, Part 1 where we discussed the phases of the real estate cycle.