On Friday, the Department of Labor released the April job numbers, and they were brutal, as expected. More than 20 million Americans lost their jobs in April, and the unemployment rate now sits at 14.7%. “Both numbers easily smashed post-World War II era records and help reflect the profound damage done through efforts used to combat the virus,” according to a CNBC report. Given that the survey is conducted in the middle of the month, and reports show at least 3 million newly unemployed people each week for the last several weeks, this number is closer to 20% as we stand today.
During The Great Depression, our unemployment (UE) rate hit 24.9%, which means things have been worse before. However, what made Friday’s announcement so brutal was that it took just six weeks for America to move from 4% UE to 15% UE. The Great Depression was a long, slow, and painful descent. The economic impact of COVID-19 was sudden and swift. More than 33 million Americans lost their jobs since the middle of March.
When COVID-19 fully emerged in America in early March, many optimistic economists and large financial institutions predicted a “V-Shaped” recovery. This simply meant they expected a fast and steep decline, followed by a fast and steep rebound. This in contrast to a “U-Shaped” recovery, which involves a prolonged period well below maximum economic output or “W-Shaped” recovery, which sees some ups and downs in our path back. As we sit today, some still think a “V-Shaped” recovery is possible, while most are more pessimistic.
As America begins to open back up, it’s hard to imagine a “snapback” scenario for several reasons. First, employers will be much slower to rehire than they were to let people go. Why? Most people will be slow to engage in their “normal” activities. Recent polling makes clear that most Americans don’t yet feel safe and are concerned about opening back up. Further, many are still understandably worried about losing their jobs. Since this is a consumer-driven economy, employers will try to balance their overhead with consumer demand. This means slower hiring. When the labor supply is high, wages tend to fall.
Second, many sectors of the economy will be running under capacity for some time to come, and many sections of the country will be slow to re-emerge. Airplanes, movie theaters, restaurants, and sporting venues (to name a few) will be operating with far fewer customers in them for a while. Major economic centers like Chicago and New York City are still suffering from incredibly high new case counts. This says nothing of the potential for secondary surges in cases as we open up or the second wave in the fall. These are reasonable possibilities, and either would have an impact on consumer sentiment and the economy.
This doesn’t mean June won’t be better than May. Or that we won’t see the economy improve in the third quarter relative to our current situation. It seems likely that we will. But, an improving economy is very different from an economy that snaps back in place, which means we’re likely to see a near-term economic picture that is improving but well below our pre-COVID reality. That makes a “U-shaped” recovery, a “W-Shaped” recovery, or what is being described as a “Nike Swoosh” recovery, seem more likely than a “V-Shaped” snapback. The former head of the FDA predicted an 80% economy relative to pre-COVID levels.
This reality, however, doesn’t mean all sectors of the economy will experience the same thing. In fact, at New Home Star, we’re bullish on what could happen for new home sales in the rest of 2020.
Take away COVID-19 for a minute and imagine the following situation. Historically low-interest rates, incredibly low resale supply, and pent-up demand. That combination sounds like the perfect combination for the new construction housing market, doesn’t it? Well, that’s exactly what we have right now. And, homebuilders have been able to sell homes during this period at varying levels of success (New Home Star finished April ahead of its 2020 pre-COVID plan), even though demand definitely fell in late March and April.
When this all started, during an all-company “virtual town hall,” I suggested that being forced to be inside your home all day might actually accelerate people’s desire to purchase on the other side. Having to stare at the things you hate, and experience a lockdown inside of the home that you’ve already thought about leaving behind, could make you eager to move your life forward on the other end. This is especially true for customers who aren’t afraid they will lose their job.
This brings us back to COVID-19 and the dynamics of the economic pain that have been unleashed. The reality is that most people who just lost jobs aren’t part of the traditional new home buyer market. While this fact should make us pause to think about the distribution of economic gains and burdens in our system, from a purely academic and economic perspective, it’s a fact. Consequently, the majority of those who were thinking about buying a new home before, or might be thinking of it after being locked in their home for two months, have probably retained their employment. And, while there are likely more job losses to come in the month of May before the hiring process begins anew, most Americans who will lose their jobs have already been laid off.
Put all of this together, and you have a consumer population whose buying power has largely been unaffected by the crisis, low rates, low supply on the market, and pent-up demand. That’s a good combination for the new home construction industry.
The economy may not snap back, but new housing just might.