The novel Coronavirus COVID 19 is on everyone’s minds. And for those of us in the middle of construction, or simply planning a new build, it’s natural to wonder how the pandemic might affect our homebuilding plans. I stress the word “might” because no one can be sure how long this pandemic will last, or what or how long-lasting its effects may be.
In an effort to better understand what could possibly happen in residential construction in the near future, I talked with a small custom, local builder and scoured the internet for articles on the subject. Most of the information I got came from newspaper articles from different regions of the US, BUILDER magazine and Architect Magazine.com.
BUILDER's editorial director John McManus writes that the construction and homebuilding industries need to keep working during the outbreak, and that there's no reason they can't do so reasonably and more carefully. He says "We'll get through this. We obviously need to keep people working where we can... [But] we need to do what we can not to inundate an already-stressed out healthcare system with thoughtless or reckless decisions regarding our precious human resource of workers.”
The impact of COVID 19 on the U.S. economy is impossible to predict because there are so many unknowns. Most sources are relying on logic and historical data from other slowdowns in the economy/construction industry to make predictions. Unlike the drops in home sales and homebuilding during the 2008 mortgage crisis, the effects of this pandemic are not expected to last nearly as long. Exactly how long COVID 19 will affect the construction industry will depend on how quickly we can contain the virus, plus the national and international economic reaction to the pandemic. Most current estimates are that the pandemic will cause an 8 week delay in the start of, or completion of construction.
Rob Deets, chief economist of National Homebuilders Association said on the HBA's podcast that he predicts the homebuilding industry will experience a temporary downturn with declines in remodeling, single family home builds and apartment development. But residential construction, he thinks, will rebound at the end of 2020. Other sources think that the economy and homebuilding industry won’t come back to normalcy until sometime in 2021. Mr. Deets is estimating that 40% of builders will see major traffic declines, and another 40% see minor traffic declines. Homebuilding contracts, he thinks, will be deferred, but not completely lost.
Nat Hodgson, CEO of the Southern Nevada Home Builders Association, feels the luxury homebuilding market will see steep declines since there have been such drastic drops in the stock market. Many homeowners building luxury homes use equity and stocks to pay for projects, so if the value of their portfolio is way down, many will be delaying or canceling homebuilding plans. On the opposite end of the spectrum, Hodgson is also worried that fewer starter homes will be started since populations building starter homes are likely to be hit hard by layoffs and a loss of income.
Because of growing concerns over the spread of COVID 19, Boston Mayor Martin J. Walsh announced a two week halt to all construction projects in the city of Boston. Boston’s construction ban went into effect on Tuesday, March 17, and will last at least two weeks. Boston’s construction ban is the first of its kind in the United States. Nearby Cambridge, MA has also banned all construction. But Cambridge, MA has enacted an indefinite ban, which began on March 21. Massachusetts Gov. Charlie Baker said he had “no plans” to stop construction statewide.
Boston and Cambridge gave construction crews almost a week to make construction sites safe and secure by Monday, March 23. Construction companies, individual contractors, and developers have all been ordered to halt all work in those cities. The only exception to the construction ban is for emergency work, such as emergency street repairs and utility hookups. This work can continue with approval from the City.
As states and municipalities increase restrictions in order to slow the spread of the
COVID 19, similar construction bans may soon be implemented elsewhere in the nation. But Jim Tobin, lobbyist for National Home Builders Association, is fighting for all construction to be deemed an "essential activity" during the pandemic and to ensure that federal, state and local permitting continues.
The “construction as an essential activity” argument seems to have worked in California. Although California has a shelter-in- place mandate that requires all individuals to stay at home, construction, including residential construction, was deemed an essential service that can continue. California’s governor has said that beyond the construction workers actually doing the building, those in construction operation, inspection and maintenance are also exempt from the shelter-in-place mandate.
Ali Wolf, Director of Economic Research for Meyers Research says she’s hoping for a sharp, short drop in the US economy with a rebound starting in May or June. During the downturn, she predicts layoffs, bankruptcies, and bailouts, but says “if we can get COVID 19 under control, it can be something that turns around fairly quickly, but, honestly, no one knows.” Wells Fargo, JPMorgan, Moody’s, and Goldman Sachs are also forecasting an economic slowdown that’s short and steep.
The second possibility is a long, drawn-out recession. The possibility of a long recession increases as government, corporate and individual debt increases. In addition, the longer the pandemic persists and the more widespread the disease, obviously, the greater impact on the economy and the homebuilding industry. One bright spot is that Ali Wolf expects lending rates to stay low until the economy gets back on track.
Once the effects of the pandemic start to level out, it may be a great time to start a homebuilding project since you will be able to potentially lock in an extremely low interest rate. That does, of course, depend on your ability to come up with a downpayment, which may be a challenge given the current reality of decreased work hours, smaller paychecks or unfortunates layoffs.
This time of low interest rates could also be a time for some of you to apply for a cash-out refinance for home improvements or remodels— either so you can stay in your newly improved home, or to get that home ready to put on the market before building your custom home.
Finally, let’s at a few specific areas of homebuilding and how the virus might affect them...
Permits and Inspections: Different local areas are reacting differently and setting up different protocols to keep their workers safe. In some areas, permit offices are either closed, or running with reduced personnel. That means in some areas, inspectors are not going out to active construction sites for inspections and building permits will either be delayed, or on hold until pandemic conditions improve.
National Production Homebuilders: With most of us being advised to shelter-in-place and observe social distancing, nearly all open houses and model homes around the country have closed for public tours. Some large national production builders are allowing private tours of their model homes and many of them are promoting virtual tours. According to the LA times, national production homebuilders Lennar said they are pausing land purchases, but that sales and construction will continue. Different production builders in various parts of the country will have different plans regarding new and existing contracts. Contact national homebuilding companies you’re interested in for their specific policies.
Construction schedules: Schedules will undoubtedly be delayed— whether that means delays of a few weeks, or several months, no one knows. Delays could be due to lagging delivery of materials, slower permitting and inspections, loss of construction workers due to illness or quarantines, or extra time needed for trades to do their work due to social distancing and sanitizing efforts. These conditions will cause most projects to be completed later than planned.
Contracts and agreements: Insurance policies, lending agreements, and leasing agreements may have to be modified to cover a longer than expected period of construction.
Prices: It’s hard to say what housing prices and construction materials and labor prices will do. There will most likely be a decrease in the supply of construction materials since many companies won’t be producing as much due to financial strains and personnel shortages. Typically, if there is a decrease in supply of goods or laborers, and demand remains the same, prices tend to increase. But this pandemic will probably also cause a decrease in demand for construction materials and labor since many homeowners will delay their plans to build. With decreases in supply and demand, prices of construction materials and labor could stay stable, without much movement up or down. This is just a prediction. The truth is, none of us knows how prices will be effected. But at this point, it seems probable that the virus could simultaneously decrease both the supply and demand for new houses and housing materials and laborers.
Since you’re listening to a podcast about how to build a quality house, you’re probably like me— someone who likes to have a plan, and someone who likes to be in control, at least most of the time. Unfortunately, the uncertainties associated with the spread, duration and effects of COVID 19 won’t allow us to plan or be in control like we would like. We’re kind of at the mercy of this thing.
The good news is that the mortgage rates are amazingly low and the duration of COVID 19's impact on the U.S. could be fairly short-lived if government officials continue to enact containment measures and offer economic support to businesses and individuals affected by the virus.
And even if your homebuilding plan will be significantly delayed, more than likely, your plan won’t have to be indefinitely deferred. It may take a few more weeks, months or even years more than you hoped to complete your dream house, and that’s can be disappointing and frustrating, but let’s be intentional about being grateful for life, relative health, loved ones and a future and be thankful that things are as well as they are.
Thanks for stopping by. Stay safe and well and join me next time for the next episode of BYHYU.
Please remember that the purpose of this podcast is simply to educate and inform. It is not a substitute for professional advice. The information that you hear is based the only on the opinions, research and experiences of my guests and myself. That information might be incomplete and it’s subject to change, so it may not apply to your project. In addition, building codes and requirements vary from region to region, so always consult a professional about specific recommendations for your home.