MReport April 2020

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52 | M REPORT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST DATA Honey, We Shrunk the Homes … Data says the shrinking size of homes could be a precursor to a recession. A report by the National Association of Home Builders (NAHB) dis- cusses the current state of housing. Specifically, the report focuses on the demographic of single-family home size, of which the report reveals is steadily con- tinuing to decrease. The reason for this decrease in new single-family home sizes was attributed by the report as mostly being a result of the Q 4 2019's inter- est rates remaining low, as well as to the fact that builders were look- ing for additional entry-level supply. Through data obtained from the Census' Quarterly Starts and Completions by Purpose and Design as well as NAHB's own analysis, the median single-family square floor area lowered to 2,252 square feet, while the average square footage for new single-fam- ily homes rose to 2,511 square feet. On a more stable, one-year moving average, the recent shrink- ages in new home size clearly shows that following cycle lows (and on a one-year moving average basis), an average new single-family home is currently no more than 6% bigger than 2,505 square feet. In fact, the average size (median) is no more than 9% larger, measuring in at 2,280 square feet. The increase that occurred in single-family home size followed the same pattern that it has throughout history, escalating post-recession. Likewise, new home size normally falls before and during a recession. This is attributed to home buyers spending less as they are feeling the financial pressure and are on high-alert, limiting their purchases and tightening their purse strings. Home sizes then elevate as the pattern sees wealthier, high-class home buyers with far less fear and worry about finances return- ing to the housing market to make further home purchases in great numbers. This same pattern was followed in this quarter, the effects being largely attributed to the weak market regarding the niche of first-time homebuyers. Another factor is seen as the supply-side constraints that exist in the build- ing market today. However, the good news is that the shrinking sizes over the past years, if fol- lowing suit of the same pattern, will have stopped declining, meaning that this trend in lessen- ing size will decline as builders flood the market with more entry-level homes for buyers to choose among. Housing Permits, Completions, Starts All Report Declines One economist says year-over-year gains are "in our rearview mirror." H ousing permits dropped 5.5% in February to 1.46 million from the prior month and housing starts fell 1.5% month-to-month, ac- cording to the U.S. Census Bureau. The Census states that hous- ing starts are still 13.8% above the February 20109 rate of 1.28 million. Housing starts are 39.2% above last year's rate of 1.14 million. Housing completions fell slightly from the prior, as the Census re- ported a 0.2% drop in February to 1.316 million. Completions are up 1.2% from the February 2019 rate of 1.33 million. First American's Deputy Chief Economist Odeta Kushi said the year-over-year gains are "in our rearview mirror" as the impact of COVID-19 on consumer confi- dence and future home building remains to be seen. "The most recent homebuilder confidence report, while still upbeat, is beginning to indicate early signs of Coronavirus-driven headwinds to the construction industry, particularly concerns around supply-side disruptions and future demand," she said. Kushi added, "The fundamen- tals, which drive new home sales remain—near record-low mortgage rates, a limited supply of exist- ing homes for sale, and sturdy demand driven by millennials—a generation that is aging into the key lifestyle decisions which drive homeownership demand."'s Senior Economist George Ratiu said the most recent construction data does not account for the "dramatic shift" in the nation since the spread of the virus, remote work policies, travel, event cancella- tions, and monetary response. "The massive measures being put in place in the second half of March to contain the spread of the coronavirus—social distancing, work from home policies, closures of restaurants, retail stores, libraries, and gatherings of over 50 people— are reverberating across the eco- nomic landscape," he said. "With millions of Americans working and caring for families at home, housing is experiencing a notice- able contraction in foot traffic, which will translate into a sharp decline in home sales over the next few months. As homebuilders are likely to put projects on standby to protect their workers, construction activity can be expected to show a noticeable further slowdown in March and April." BuildFax's February report on housing supply found single- family authorizations grew 0.24% year-over-year. Existing housing maintenance volume rose 6.20% annually and the volume of hous- ing remodel grew 5.42% annually. "The broader economy is experiencing a volatile month as the stock market and general population reacts to the implica- tions of COVID-19," said BuildFax Managing Director Jonathan Kanarek. "Meanwhile, housing activity remains nearly unchanged from its growth trajectory thus far. However, COVID-19 is rapidly unfolding in the U.S. and the hous- ing market may eventually feel the weight of this outbreak. For instance, the virus may dampen spring homebuying season this year as prospective buyers could feel reluctant to attend open houses. Additionally, quarantines may lead to declines in construction work, the already strained U.S. housing supply may continue to tighten."

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