2020 Has really taken everyone by surprise. Between massive wildfires in Australia, Brazil, and the United States, and a global pandemic, unseen in scale since the Spanish Flu of 1918, the world is unstable. Fortunately, the construction industry has come out of the uncertainty of this year with surprising resilience.
The initial crash
The initial nosedive that the markets took was a scary downswing. Commercial contractors looked on in horror as demand sank and business slowed to a crawl. The main factors that were affecting the economy at the time were legal requests with housing-related finances.
- High levels of billing disputes.
- Landlord tenant issues where at their highest since 2010.
- High levels of debt collection.
- Credit repair at high levels.
- Employment and employment law, thanks to high unemployment.
Requests for the above 5 items specifically reflect a downturn in the housing market. Low employment, billing problems, and bad credit all combined to make a difficult landscape for construction. The result was the LegalShield Housing Activity Index took a 1.9 point fall from Q4 119 to Q1 2020.
Another problem was the early pauses on economic activities enforced by state and local governments in early 2020. These types of activities caused lumber to crash, going down in price by over 40%, demonstrating a plummeting demand.
Fortunately, despite the early 2020 market downturns, numbers were still far higher than they were post-recession. The downturn was relatively minor compared to the 2008 crash.
Despite an early-year dip in the market in 2020, the recovery is expected to continue in a V-shaped manner through 2021. What exactly is a V-shaped recovery? Looking at a graph of various market indices, it shows a steep drop followed by a steep rise. The steep drop was caused by panic over early COVID-19 concerns. That’s understandable. But what’s caused the recovery. We’re going to look at the reasons for the speed and volume with which the market has taken it’s post-COVID crash upturn.
What exactly is the residential building market based on? What data is taken into account to determine its over all market health? Let’s look at the main factors. These are sets of economic data gleaned from the government and reports from businesses.
Consumer financial stress and consumer confidence
Why are two factors considered at the same time? Because they directly correlate with each other – negatively. When stress is high, confidence is low – and vice versa. During August 2020, the consumer financial stress index dipped to the lowest point on record.
This may seem strange during a time of nearly 30% unemployment, so let’s figure out why financial stress is so low.
- Government stimulus money has helped many pay off credit card debt.
- Enhanced unemployment payments.
- Lender-provided payment deferral and debt forbearance.
- Some jobs lost to the pandemic have been recovered.
These numbers are actually pretty good. It’s important to remember though that stimulus and unemployment won’t last forever. Additionally, a second-wave of the virus could cause further job losses.
Fortunately for the US economy in general, bankruptcies have been on the decrease since the 2008 recession. There has been a steady slowing of bankruptcies filed since their most recent height in 2010. Bankruptcies are less than half of their 2010 numbers.
These number are good, but they are not certain to stay that way. As stimulus checks evaporate and unemployment decreases to pre-pandemic levels, people will have a tougher time paying for things. Another thing to consider is in the case of a second winter wave of COVID-19, there could be significant further job losses. Long story short, the bankruptcy index is not nearly as confident as consumer financial stress.
Housing activity index
In August of this year, the housing activity index surged to the highest on record. Additionally, from May-July, housing starts (new constructions) grew by double digits each month. The reasons for the spike are several.
- Building continually going up in suburbs.
- Construction employment rising.
- Price increase in lumber this year, doubling what it was in April.
The construction industry’s resilience is also partly based on luck. Most construction is outside, where the air is rarefied and it’s harder to infect people with an airborne pathogen. Thus, construction is much less affected by pandemic shut-downs.
Like many of the housing trends, foreclosures have been on a steady decline since the 2008 recession. Foreclosures fell to an all-time low in August this year.
However, foreclosures are one of the less-sturdy measures in these times. One enormous reason for the low numbers is that landlords and property managers have suspended evictions/foreclosures. This has brought Q2 foreclosures down to 24,000, an all-time low. Worrying though, is the thought of what happens when evictions and foreclosures are no longer on hold.
Real estate index
The real estate index is a measure of several different stats. It represents over-all demand for homes by looking at home-buying activity and mortgage applications.
Fortunately, a strong demand/increase in demand and the low cost of borrowing have kept the index quite high. The real estate index jumped to a 15 year high in Q2 of 2020.
What’s it all mean?
You can probably safely bet that building trends will at least stay stable through 2021. The increase in construction might continue, but a lot of the ground gained this year is shaky at best.
- The low consumer is inflated by stimulus and high unemployment – which won’t last forever.
- Lender forbearance and pauses on debt payments are temporary.
- Holds on foreclosures and evictions are not permanent.
- A winter wave of the pandemic could shut down much of the economy and further hurt construction. Including by limiting building materials/ cutting down demand.
We can help
If you want to build, but aren’t sure, head to Reliable Commercial. We are experienced and highly professional construction contractors who are ready to help in uncertain times. Send us a message today and we can get started on your project.