Increasingly restrictive measures on people’s movement, and an imminent surge in unemployment, means we expect total home sales will drop by around 35% in the second quarter compared to the end of 2019. But the dip should prove short-lived. Assuming a strong fiscal and monetary policy response, pent-up demand from the spring buying season will help sales recover by the end of the year.
- Increasingly restrictive measures on people’s movement, and an imminent surge in unemployment, means we expect total home sales will drop by around 35% in the second quarter compared to the end of 2019. But the dip should prove short-lived. Assuming a strong fiscal and monetary policy response, pent-up demand from the spring buying season will help sales recover by the end of the year.
- The March NAHB homebuilder confidence survey provided the first evidence of the impact of the coronavirus on the housing market. The drop in headline confidence, to 74 from 72, was relatively small. Indeed, at 56 the traffic of prospective buyers is consistent on past form with flat new home sales in March. (See Chart 1.) But half the respondents to the survey replied before March 4th, when most were optimistic that the virus would have a relatively small impact on the US economy.
- The situation has worsened considerably since then, and a sharp fall in home sales is now inevitable. Even before federal and local authorities started imposing restrictions on movements and gatherings, concerns over the economic outlook, combined with the obvious risks of viewing properties, would have hit transactions. As those restrictions have tightened, the outlook for home sales has deteriorated.
- There is no precedent for the current situation, but past collapses can give us some idea as to the likely magnitude of the upcoming fall in sales. On a per capita basis, the two largest falls in total home sales occurred from Q1 1979 to Q2 1982, and from Q1 2006 to Q1 2009. (See Chart 2.) From peak to trough, sales per capita dropped by 54% and 48% respectively.
- We doubt the overall fall in sales will be that large. After all, in both those cases home sales were at an unsustainably high level before they were hit by the recessions of the early 1980s and mid-2000s. They therefore had a long way to fall. By contrast, a lack of inventory and sensible lending practices meant home sales on a per capita at the end of last year were at the average seen since 1975.
- But the drop is set to take place over a much shorter period. Our best guess is that per capita sales will drop by 35% in the second quarter compared to the final quarter of 2019. (See Chart 2 again.) That would mean total home sales of around 4m annualised, the lowest since the start of 1991.
- That drop should prove short-lived. Governments are ramping up their response to the crisis, and provided the country starts to return to normal a surge in pent-up demand from the spring buying season will push sales close to their previous level by the start of next year. However, given that household incomes, savings and confidence will take time to recover, sales over the following year are likely to be lower, rising to 6.1m annualised by end-2021 compared to our previous forecast of a rise to 6.3m.
Chart 1: NAHB Buyer Traffic & New Home Sales
Chart 2: Total Home Sales (Per 000 People)
Sources: NAHB, Census Bureau
Sources: Refinitiv, NAR, Census Bureau, Capital Economics
Matthew Pointon, Property Economist, firstname.lastname@example.org