Will a COVID-19 Real Estate Contraction Look like 2008?

Economic Report Monitor #5
March 31st, 2020

The last day of March marks the end of the first quarter of 2020. Equity markets suffered as an 11 year bull market run comes to an end. The major indexes record major losses: DJIA down -22.07%, S&P 500 down -19.15%, and NASDAQ -13.42%. Crude oil markets are even more in a frenzy as COVID-19 shutdowns are likely to limit demand growth while the Saudis and Russians pledge to increase production in a fight with US shale. WTI futures are down over -66% on the year so far with Brent Crude futures not far behind at close to -60%. Overall, commodities were hit hard with the Bloomberg Commodity Index down -23.53% obviously anchored down by energy commodities. 

What has yet to be seen is deterioration in real estate data as a lot of indicators lag the more up real time financial markets. The S&P Corelogic Case-Shiller Index is no different as it released its January 2020 reading this morning. The mostly ignored report showed modest growth in the National Index as the annual gain increased from 3.7% to 3.9%. In the 20-City Composite, all cities saw price increase with more than half seeing price growth accelerate. Of course, these transactions did not feel the impact of COVID-19 as the stock market didn't even print it's latest all-time high until February. However, the report brings into focus the boom/bust cycle of the real estate market and what could happen if home purchasing freezes in financial crisis proportions.

When the market crashed from peaks in 2006, the National Index fell over -27% with the metropolitan regions finding it a bit tougher with drops of more than -35%. Since the global financial crisis started in the real estate market, it seems like these drops might not occur again in 2020, but there is really no precedent for a countrywide lockdown to this level paired with a complete economic standstill. There definitely seems to be some room to run lower as the recovery since 2012 has been robust and topped the previous 2006 peaks. One thing that seems likely to happen is gravitation away from dense urban areas as a public health crisis is likely to create some distaste for cities in the immediate aftermath. For that reason, the metropolitan area indexes, the 10-City Composite and 20-City Composite, are likely to see significantly higher price deterioration than the National Index, even larger than what occurred in 2008. 

While lagging real estate data provided no real view into the current effects of COVID-19, the March report of the Chicago Business Barometer from the Institute of Supply Management gave us something. The index came in 1.1 pts lower at 47.8 pts which is far off from what the two recent Fed surveys revealed. This might have to do with when the survey ran, March 2-16, a period where most businesses could have been unaware of the effects the virus was about to have on the economy. Recorded business sentiment actually rose, 0.2 pts to 46.6 pts, along with three of the five main indicators. Production and new orders saw declines with new orders seeing a hefty 7.9 pt drop. The report notes that "While some firms reported a rise in orders due to stockpiling by US customers, others noted a fall in new business COVID-19," suggesting there may be more businesses benefitting from stockpiling than some reports imply. Inventories, though, slipped to the lowest level since Oct 2009 likely caused by China's earlier shut down limited supply. No movement in employment either as the index only gained 0.3 pts. Interestingly, in the special question, 69.1% of respondents said they see new orders at the same level or higher in Q2 compared to Q1.

The second measure of consumer sentiment from Conference Board came out for the month of March following a troubling number from University of Michigan. The index dropped 12.6 pts to 120 pts as a minor drop in the current situation was overwhelmed by a 19.9 pt drop in the Expectations Index to 88.2 pts. As expected, consumers are bracing for layoffs and salary cuts which has already occurred as shown by the unemployment claims number last week. As seen in the report, consumers were more negative about the labor market with an increase of 6.1 pts to 8.8 pts in the amount of of respondents who see fewer jobs in the months ahead. Overall, the numbers this month suggest trouble ahead as Lynn Franco, Senior Director of Economic Indicators at The Conference Board, mentions "March’s decline in confidence is more in line with a severe contraction – rather than a temporary shock – and further declines are sure to follow."