With the news and social media inundated with stories regarding the coronavirus, it can be difficult to sort the hyperbolic and sometimes hysterical dross from actual fact.
As of this writing, less than 200 cases of the virus have been reported in the U.S., a country of over 300 million people.
And yet, stories abound of people stockpiling Spam and widespread shortages of face masks and hand sanitizer. The “preppers,” as they are being called, are creating huge lines at Costco, Walmart and Target, with their multiple carts overflowing with nonperishable items like they are expecting a hurricane that covers the world.
While the virus in the U.S. has not been widespread, the economic effect of the news regarding the virus has already been monumental.
In one of my recent columns, I likened this type of scenario to the butterfly effect. In chaos theory, the butterfly effect refers to the idea that due to the interconnectedness of all things, a small event can result in large effects on a nonlinear, dynamic system.
One of the “large effects” that can be attributed to the news of the spread of COVID-19 is the correction in the stock market we experienced last week.
The loss of confidence in the American stock market stemmed not from the virus itself but also from the massive efforts to contain it in the more severely affected countries like China, South Korea, Italy and Iran.
Factory shutdowns and travel moratoriums in those countries are affecting global supply chains and stoking public fears worldwide, dampening normal consumer activities like shopping, travel and participation in public entertainment. China’s PMI has collapsed as a result of the containment policies there.
How this affects U.S. housing
To get a handle on what this economic tumult means to the U.S. housing market, we need to look first to the bond markets.
A stock market correction, which is defined as a drop of at least 10%, is inevitably accompanied by movements in the bond markets as investors sell off stocks and park their money in bonds – and this is what we saw last week.
News of the spread of COVID-19 was instrumental in the decline of the 10-year yield to the lowest levels ever recorded.
A lower 10-year yield generally translates into lower mortgage interest rates, which can be a stimulus to home purchases and refinances. But when lower mortgage interest rates are combined with a potential economic turndown (dare I say recession, not there yet) the outlook for the U.S., the housing market gets more complicated.
In order to assess how the housing market will be affected by the COVID-19, we first need to look at the market prior to the outbreak.
Purchase applications have had five-straight weeks of double-digit year over year growth between 10 and 17%, as seen in the graph below.
We have not seen growth like this since 2016. Additionally, new home sales just came off the best single report we have had in this expansion and housing permits are at cycle highs. (See below).
Prior to the outbreak, other economic data in America also looked good. Regional PMI data, jobless claims and retail sales were all positive, pointing to another year of economic expansion. Even the Boeing delays did not seem to be denting our continued expansion.
In 2020, we would expect sales for both new and existing homes to be around 6 million units. So what can we expect to happen when COVID-19 virus drops into this fertile economic soil? Here are some things to look for that would indicate a possible slowdown in the housing market.
First, the stock market selloff can take confidence away from high-income earners, especially those that would need to sell equity for a down payment.
Unless the virus news gets worse and the market stays down, the current market correction and individual loss of equity are not significant enough to crash the housing market.
The employment picture has been excellent. But jobless claims are susceptible to a sharp spike higher if world growth slows down with domestic containment policies limiting normal travel and consumption. The scale and duration of the COVID-19 outbreak will determine if unemployment rates go significantly higher.
Our regional manufacturing data has improved in the past few months. Regional manufacturing is a big component of the leading economic indicators (LEI) and its recent move higher has driven LEI in a positive direction. This data line is at cycle highs as well.
However, if world growth slows down and oil prices keep falling this data line will turn down. LEI has the potential to fall 4-6 months straight if the spread of the virus weakens manufacturing while increasing jobless claims – two components of leading economic indicators. This data line is part of my six recession red flag model, and, so far, I haven’t raised this flag.
St. Louis Financial Stress Index, which is above zero when we are in a recession, has been at all-time lows set in February, as seen below. Expect this index to rise noticeably if the duration and scale of the virus outbreak increases in the U.S.
If containment policies are implemented here in America to the extent we have seen in some other countries, then the housing market will take a short term hit.
Americans won’t be buying houses at the same rate we had if they become afraid to go outside to mingle with the public. However, scale and duration are key here. This 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-breaking expansion of the economy of the last 10.5 years has put us on good footing to weather a possible downturn. Our demographics and low mortgage rates are two powerful positives for the housing market and should outweigh the negative effects of a short term economic downturn.
The housing market is strong enough to handle a short term hit to global demand.
Where do we go from here?
For now, I recommend focusing on the positives, rather than falling prey to the fantasies of gold bugs and survivalists. The next six months can produce some terrible economic headlines, but don’t ever forget we are a strong, proud, hard-working people and we won’t take this lying down.
Here are three things we can do as a nation in response to this short-term, albeit, horrific virus outbreak:
- Institute an instant payroll tax cut to help prepare families for a possible economic downturn and to assist with any extra costs associated with virus prevention.
- Provide an open-ended emergency assistance fund for 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 for all COVID-19 related medical bills including quarantine costs. Free tests for those with symptoms and free vaccines when they become available.
Notice I didn’t mention anything about the Federal Reserve cutting rates by .5% like they did today, this was done on purpose.
It’s time to show the world the true power of King Dollar. I mean, we have been providing billions of dollars to farmers struggling during this trade war – it’s time to declare war against this virus.
Remember, too, that the world today is a much different place today than it was in the days that the Spanish flu claimed so many lives. We have better drugs to fight secondary infections, sophisticated medical protocols to assist those that do fall ill and a concerted effort worldwide to contain the spread of the virus and create vaccines against it. We can handle this.
Rather than panic, my recommendation is to wash your hands a lot, don’t go to work sick and take precautions to stay healthy. Don’t forget to enjoy life.