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Why the Latest Housing Numbers Are Worse Than They Look

By John Bromels – Updated Apr 22, 2020 at 4:07PM

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A drop of 17.5% in new construction starts seems tame at first glance ... until you look at the context.

There's no doubt about it: March's housing numbers were awful. 

As reported by the U.S. Census Bureau and the Department of Housing and Urban Development on April 16, new home construction starts for single-family homes -- the sort provided by D.R. Horton (DHI 4.18%) and NVR's (NVR 4.42%) Ryan Homes -- were down 17.5% from February 2020. 

Considering how disruptive the coronavirus has been to the overall U.S. economy, with more than 90% of Americans under stay-at-home or similar orders, that may seem like an indication that things aren't so bad. But the underlying context reveals bad news for homebuilders and other stocks that benefit from a strong housing market, like Home Depot (HD 2.06%) and Lowe's (LOW 1.93%).

Illustration of a wrecking ball smashing into a house.

Image source: Getty Images.

A historic slowdown in starts

Let's put that 17.5% number into context.

First of all, it only refers to single-family homes. While that's the only number that may matter to homebuilders like D.R. Horton and NVR, it's not the only part of the housing market. Starts for new multi-family homes (like apartment complexes) with five or more units tumbled 31.6%. That means overall housing starts fell by 22.6% from February to March. 

That still may not seem like a huge number, given everything that's going on right now, but it's the biggest month-over-month percentage drop in starts in more than 35 years. You'd have to go back to March 1984 (what is it with March and housing declines?) to find a larger single-family home drop of 26.4%. 

Even with that giant monthly drop, though, housing starts were still up 1.4% year-over-year. Rock-bottom mortgage rates drove up demand through late 2019 and into February 2020. So, if things are up year-over-year, that's not so bad, right?


Housing was fine until it wasn't

It's easy to forget that the coronavirus pandemic hasn't actually been going on all that long. While the first confirmed U.S. case was identified on Jan. 21 in Washington state, it was March 4 before the U.S. had 100 confirmed cases, and March 11 before the U.S. surpassed 1,000 confirmed cases. March 11 was also the day the World Health Organization declared the then-outbreak a coronavirus pandemic, and a lot of government organizations and businesses suddenly started taking action.

Before March 11, though, it was more or less business as usual in the housing market. Indeed, in a March 9 survey of its members, the National Association of Realtors found that just 16% of them saw a decrease in interest among buyers, and only 19% reported sellers considering pulling their homes from the market. 

In other words, about one-third of March was over before COVID-19 started to have an impact on the national housing market. And it wasn't until March 19 that California issued the first statewide stay-at-home or similar order.

So, while it sure may feel like you've been cooped up in your home forever, March was about two-thirds over before anyone outside a handful of West Coast municipalities was being forced to stay at home. Just 20 states had issued stay-at-home or similar orders by March 26.

With that in mind, let's look at those March housing numbers again.

What the housing sector's future holds

If the housing market was operating on, for want of a better term, "pre-coronavirus" status for the first third of March, and was severely (although not completely) impacted by coronavirus-related shutdowns for the last third of March, then it's likely that real estate activity in March was probably in between "pre-coronavirus normal" (February) and what we'll see in April. In other words, hold onto your hats when the April numbers come around!

By April 7, 42 states had issued statewide stay-at-home orders, with additional orders affecting the largest cities in three more states (Oklahoma, Utah, and Wyoming). Of the top 100 cities in the U.S. by population, the only two currently unaffected by a stay-at-home order are Omaha and Lincoln, Nebraska. That's likely to be the status quo for most, if not all, of the month. 

While in many states, home construction is deemed an "essential business" that's exempt from stay-at-home orders, housing completions fell 6% in March, suggesting that the coronavirus was still having an impact on construction work.

That impact is likely to be even larger in April. After all, if no customers are out buying new homes -- especially in the major urban real estate markets -- it isn't going to matter how many workers are available. The number of new residential building permits being pulled rose 6.5% in March, suggesting that fewer starts are likely next month. 

National Association of Home Builders (NAHB) Chief Economist Robert Dietz agrees, saying in an article on the NAHB website, "We expect further declines in housing starts in April."

Expect more bad news next month

If you thought March's residential housing report was bad, brace yourself for a downright ugly report in April.

The data suggests that April's housing numbers are going to be even worse than March's. While homebuilder stocks and those of companies affected by the residential housing market like Home Depot and Lowe's largely shrugged off the March report, they may not be able to do the same in April. 

Investors looking to buy stocks should probably wait until the other shoe drops before putting money into this troubled sector.

John Bromels has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot and NVR. The Motley Fool recommends Lowe's and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

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Stocks Mentioned

D.R. Horton, Inc. Stock Quote
D.R. Horton, Inc.
$73.69 (4.18%) $2.96
NVR, Inc. Stock Quote
NVR, Inc.
$4,315.87 (4.42%) $182.73
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$289.55 (2.06%) $5.85
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$197.66 (1.93%) $3.74

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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