Viral Uncertainty

Greater Houston Builders AssociationApril 28, 2020

Robert Dietz, Ph.D.NAHB Chief Economist

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Viral Uncertainty

Hard to model the effects of a virus outbreak

2-months, 2-quarters, and 2-years

Stock market declines

Supply-chain impacts

Declining consumer confidence

Sharp mid-year decline, bounce back after

Two-Month Considerations

Event, school and business closures

Test for the @home economy

Consumption: 40% goods economy; 60% services (half social)

Hospital limits (beds and machines) – flatten the curve

Economy pause is only a pause to ramp up medical infrastructure

Medically-induced coma for the economy (recession)

Home building and remodeling as “essential services”

Consumer Spending Shares

Source: U.S. Department of Commerce and Wells Fargo Securities

Goods 40%, Housing/Health Care 33%, Other Services 27%Motor Vehicles & Parts,

4.1% Furnishings,3.1% Recreational Goods,

4.4%

Other Durables,1.5%

Clothing,3.1%

Gasoline,3.3%

Other Nondurables,5.1%

Phamaceuticals & Theraputic Goods,4.1%

Food & Beverages,7.4%

Housing & Utilities,16.4%

Healthcare,16.9%

Communication Services,2.3%

Restaurants,5.5%

Accommodations,1.0%

Transportation Services,3.3%

Recreation Services,3.8%

Financial Services,

6.4%

Other Services,

6.2%

Consumer Spending as Share of Total

Services Goods

*Dark shades represent resilient categories of consumer spending.

Flatten the Curve….But Raise the Line Too!!!

Two-Quarter Considerations

Virus cases subside

Financial markets stabilize

Terrible 2Q, decline in 3Q, rebound in 4Q

Aggressive fiscal policy

Federal Reserve finances restoration and recovery

Spring forward after the Fall

Virus Considerations

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Perc

enta

ge S

prea

d

Percentage Time Period

US is on exponential growth curve now

The S Curve of Community Spread

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Perc

enta

ge S

prea

d

Percentage Time Period

Red is unchecked exponential growth --- blue is S curve logistic

The S Curve of Community SpreadCase data is moving on logistic S curve

y = 752.62e0.1697x

y = -7.5013x3 + 1061.4x2 - 17490x + 55379

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79

Series1

Two-Year Considerations

Vaccine

Interest rate normalization (low until then)

Baby boom???

Checkerboard pauses? W-shaped recovery

Changes for how we live?

World Temperature Map (November 2018 - March 2019)The new epicenters of disease were all roughly along the 30-50 N” zone

Source: Sajadi, Mohammad M. and Habibzadeh, Parham and Vintzileos, Augustin and Shokouhi, Shervin and Miralles-Wilhelm, Fernando and Amoroso, Anthony, Temperature and Latitude Analysis to Predict Potential Spread and Seasonality for COVID-19 (March 5, 2020). Available at SSRN: https://ssrn.com/abstract=3550308 or http://dx.doi.org/10.2139/ssrn.3550308

GDP Growth – Sharp RecessionVirus mitigation will bring on a significant recession with declines in Q1, Q2 and Q3

Source: U.S. Bureau of Economic Analysis (BEA) and NAHB forecast.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Annual GrowthLT avg (‘58-’07) 3.4%2018 2.9%2019 2.3%2020f -4.6%2021f 4.6% 2022f 3.2%

Q/Q Percent Change, SAAR

Sudden Labor Market Reversal

Source: U.S. Bureau of Labor Statistics (BLS) and NAHB forecast.

2%

4%

6%

8%

10%

12%

14%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Job Openings Rate

Unemployment Rate

Percent, SA Percent, SA

Unemployment is rising sharply but starts recovery during second half of 2020

Payroll Employment Growth and Unemployment Rate

0

3

6

9

12

15

-5,200

-4,200

-3,200

-2,200

-1,200

-200

800

1,800

2,800

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Thousands Percent

Average Monthly Change in Payroll Employment

Unemployment Rate

Fed Funds Rate – Fed All In on Supporting Economy

Source: U.S. Board of Governors of the Federal Reserve System (FRB).

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Federal Funds – Top Rate

10-Year Treasury

Lender and buyer of last resort

30-Year Fixed Rate Mortgage and 10-Year TreasuryLow interest rates thanks to aggressive Federal Reserve action

Source: Federal Reserve and Freddie Mac data and NAHB forecast.

0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

October 31, 2016

30-Year Fixed Rate Mortgage

10-Year Treasury

Supply-Side Factors

Virus Related Business Challenges

Source: NAHB Survey

NAHB/Wells Fargo HMI Special Analysis

79%

20%

1%

0% 20% 40% 60% 80% 100%

No

Yes to a minor extent

Yes to a major extent

21% builders report supply disruptions due to coronavirus concerns in other countries

Source: NAHB/Wells Fargo HMI Survey, Special Analysis, March 2020.

Share of Building Materials Imports in 2019

31.0%

16.1%16.0%

6.0%

3.7%

3.5%

2.7%

2.2%

2.1%1.6% 15.2%

China

Mexico

Canada

Taiwan

Germany

Japan

South Korea

Thailand

Italy

Brazil

Others

Totally $65 billion imports in 2019 and 31% from China

Source: NAHB Analysis of U.S. International Trade Commission data.

Virus Related Business Adaptions

Source: NAHB Survey

Building Materials – Lumber Prices

1/5/2018, 436

582

3/27/2020, 381

$250

$300

$350

$400

$450

$500

$550

$600

2015 2016 2017 2018 2019 2020

$ per thousand board feet

Lumber prices rose 63% to a peak from January 2017; declined 13% since January 2018

Source: NAHB Analysis; Random Lengths Composite Index

Residential Construction as an “Essential” Business: April 9

Source: NAHB; https://www.nahb.org/Advocacy/Industry-Issues/Emergency-Preparedness-and-Response/Coronavirus-Preparedness/Stay-on-the-Jobsite

Affected:

10% single-family

20% multifamily

NAHB/Wells Fargo Housing Market Index (HMI)

30

0

200

400

600

800

1,000

1,200

0

10

20

30

40

50

60

70

80

2013 2014 2015 2016 2017 2018 2019 2020

Index Thousands, SAAR

Single-Family Starts

HMI

Sharp drop for HMI in April

Source: Census Bureau and NAHB/Wells Fargo HMI survey

Construction Outlook

Year Units % Change2017 852,000 8%2018 873,000 2%2019 894,000 2%2020f 728,000 -19%2021f 923,000 27%2022f 1,018,000 10%

Single-Family StartsSharp declines in the near-term due to coronavirus mitigation efforts

Trough to Current:Mar 09 = 353,000

Feb 20 = 1,072,000+204%

Source: U.S. Census Bureau (BOC) and NAHB forecast

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

80% fall

Thousands of units, SAAR

Single-Family Starts by Decade: Population Adjusted

Source: Census Bureau and NAHB analysis

47,998

53,138

41,588 41,710 41,671

21,288

0

10,000

20,000

30,000

40,000

50,000

60,000

1960s 1970s 1980s 1990s 2000s 2010s

Starts per Million Population (averaged)

Multifamily Housing StartsSharp decline and a return to trend

Year Units % Change2017 357,000 -9%2018 377,000 6%2019 404,000 7%2020f 356,000 -12%2021f 406,000 14%2022f 411,000 1%

Source: U.S. Census Bureau (BOC) and NAHB forecast

0

50

100

150

200

250

300

350

400

450

500

550

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Trough to Current:4th Q 09 = 82,0004th Q 19 = 470,000

+474%

Thousands of units, SAAR

76% fall

Avg=344,000

Residential RemodelingRemodeling market weakening along with other housing metrics, existing home sales

0

50

100

150

200

250

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Billions, USD, SAAR

Adjusted

Actual

Year Percent Change2017-2019 Avg 5%2020f -9%2021f 9%2022f 4%

Source: U.S. Census Bureau (BOC) and NAHB forecastNote: In the analysis, 1-year moving average is used for adjusted data to smooth the trend

New NAHB Home Building Geography Index

Q4 20194-Quarter MA of YOY growth rate:

1.9% in red counties-1.4% in blue counties

Source: NAHB Analysis of Census data (Building Permits)

Red counties represent 45.3% of U.S. population

60.9% of single-family construction takes place in Red Counties

New NAHB Home Building Geography Index

Q4 20194-Quarter MA of YOY growth rate:

24.3% in red counties7.2% in blue counties

Source: NAHB Analysis of Census data (Building Permits)

Blue counties represent 54.7% of U.S. population

68.2% of multifamily construction takes place in Blue Counties

Economic/Housing Conclusions

Currently modeling an 8 week pause for the economy

Virus spread will end

Baby boom???

Keep in mind the 2-month, 2-quarter, 2-year targets

Very weak mid-year economic performance, bounce back after

Thank youQuestions?

rdietz@nahb.org@dietz_econ

eyeonhousing.orghousingeconomics.com