Housing market has been surprisingly active during lockdown

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Stuck day and night in their homes, a surprising number of Americans are deciding the pandemic is a great time to upgrade.

That's how it looks to Lee Whitaker, vice president of Pacesetter Homes. After the coronavirus shutdown, the small Texas homebuilder braced for the worst. And it came: Business plunged in April. Then in May, something unexpected happened. Sales were 30% above the company’s own pre-crisis forecast for the month.

Many owners of existing homes aren't selling, which often makes builders like Pacesetter the best source of inventory. Mortgage rates are at record lows. And some house shoppers are saying if they have to be home more, it might as well be a bigger space.

"We're all doing pretty well right now and we're all, quite frankly, very surprised," Whitaker said.

Pacesetter executives are adapting to the new realities: Instead of an open floor plan, maybe some buyers will want Zoom rooms or home classrooms, Whitaker said. Across the industry, companies are using virtual showings and no-contact closings to keep deals flowing.

New-home sales posted a surprise gain last month, and stocks of homebuilders have surged in recent weeks. That's fueling optimism that the housing market, which was set for a hot spring season before freezing up when the virus hit, is bouncing back faster than expected.

"Housing has followed V-shaped recovery, no questions asked — as quickly as it fell, it's coming back," said Ali Wolf, chief economist at Meyers Research. "But there are still major risks."

It's hard to say how long the apparent recovery will last. Signs are mixed. Contracts to buy existing homes plunged 22% in April to a record low. But applications for purchase loans, which have gained for six straight weeks, are now back to early-March levels, according to the Mortgage Bankers Association.

Tendayi Kapfidze, chief economist at LendingTree, is skeptical about the recovery. The housing market can't boom with an economy that’s already lost 40 million jobs, he said.

"I think there's trouble ahead," Kapfidze said. "I wouldn't say housing is back. We’ve had some interesting months, but let’s see how it sustains itself."

Homebuilding stocks are riding the wave of investor optimism. An S&P index of homebuilders has nearly doubled since cratering on March 23 and is now down less than 2% for the year.

In some ways, Toll Brothers Inc. embodies the mixed messages of the recent housing recovery. The luxury builder said Wednesday that orders dropped 22% in the second quarter, pulled down by a steep plunge starting March 16.

But buyer deposits, which the company called a leading indicator, are up 13% year-over-year in May and reached the highest level since 2005 last week, the company said. After it reported results, the company's shares spiked when trading opened in New York on Thursday, but the stock finished the day down. It's dropped about 17% this year, worse than the loss for the S&P 500.

Dark clouds hang over housing. Job losses have hit lower-paid workers in retail and hospitality particularly hard, but the real estate market may increasingly feel the strain as unemployment moves up the income scale.

Steve Hilton, the chief executive officer of Arizona-based Meritage Homes Corp., recently said 40% of the newly unemployed Americans make less than $40,000 a year and people who work at hotels and restaurants are "generally not our buyers." The same is likely true at Toll, where customers pay an average of more than $800,000 for new homes.

Homebuyers are already facing challenges. Credit is tightening and bargains aren't particularly easy to find. Before the crisis, there was a shortage of affordable homes and that's gotten worse with many sellers deciding to pull back. Bidding wars are erupting in some places where homes are in the shortest supply, including San Francisco and Boston.

Many who apply for mortgages, looking to take advantage of low rates, may not qualify or won't find something they like in their price range, said Matthew Pointon, property economist for Capital Economics. The recovery in sales may be delayed until later this year, he said.

For now, housing has held up better than expected in the pandemic. But with unemployment high and the economy facing a long recovery, the rebound could sputter.

"It's going to be difficult to see housing expand strongly until we start to get a better recovery in the job market," said David Berson, chief economist at the insurance and financial services company Nationwide.

Bloomberg News
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