Testing Our Resiliency: Housing Market Outlook after COVID-19

Which markets in the U.S. are expected to recover the fastest? Housing Tides surveys 50 of the nation’s top housing markets. From our data you can  monitor the prospects and the progress of each market as it emerges in recovery. Jonathan Scott and I have selected the markets that we think will recover the fastest and slowest using our Housing Tides data. Follow along with us in coming weeks so you can benefit from our analysis.

Austin ranks sixth on the Housing Tides Index with a 69.3 (on a scale of 1-100, with 100 being the most healthy). The Texas State Capitol, with one of the largest universities in the country, is positioned well for the quickest rebound. Using the Housing Tides indicators, here is what influences me to pick Austin to perform well in the recovery:

• With the seat of government for one of the largest states, a major university and a burgeoning high-tech economy, Austin has one of the highest rankings in the Housing Tides Index™.
  
  
• Austin has enjoyed an extremely low unemployment level at 2.6%. This will bode well as those that have lost their jobs during the pandemic will be able to quickly go back to work, contributing to the recovery with spending and tax revenue.
  
  
• Austin remains an affordable housing market. The median home price is $335,000 and it has a price to income ratio of 0.26. This is a major reason why I picked Austin over Seattle and Washington, DC, cities with great economies, yet very expensive housing.
  
  
• It appears that housing is under-supplied with only a 1.9 month’s supply of listings and a rental vacancy rate of 4.4%. There will be no overhang of inventory available in the for rent and for sale markets. This will pave the way for increased permit activity during the recovery.
  
  
• A housing sentiment review of the 1,936 articles surveyed that mention Austin have an average sentiment of 0.12, which is more positive than the overall article average of -0.04, and sentiment is trending up. Read more about how sentiment is calculated here.
  
  
• The Permits to Household Growth Ratio shows that builders are building just 0.9 homes for every household created. The Permits to Employment Growth Ratio is 1.3, meaning that more housing units are being created than jobs, but at this level it is not a major cause for concern.

At #2 in our current Housing Tides Index rankings, the Atlanta metro area is poised for strength on the other side of the pending recession. Here is why I expect the Atlanta housing market to recover well:

• Coupling a desirable Sub Belt location with an economy that doesn’t rely on the hard-hit tourism sector, we get a market where housing demand is supported by job growth and household formations. Data suggests that builders in the Atlanta metro area have been building a broadly appropriate number of homes, putting up 0.7 new units per job added and 1.1 per household formed.  Consider this jointly with the current for-sale inventory of just 2.6 months of supply, and we have evidence that there is no imminent glut of housing in the Atlanta area.
  
  
• Architecture and construction firms have had their expectations flattened across the U.S., but it is clear that businesses operating in the South region believe they will fare better than those in other locales. While still exhibiting steep declines, both the Architecture Billings Index and the Housing Market Index surveys have fallen far less for firms in the U.S. South than, for example, those in the Northeast and Midwest.  Of course, we should pay attention to what construction professionals are telling us about their expectations.
  
  
• After adjusting for interest rates and local incomes, the monthly payment for a home at the median price of $260k would cost a typical buyer just 22% of their income. This represents a meaningful savings when compared to the monthly payment for a median rental, which would cost a renter 33% of their monthly income.  It is also noteworthy that the median home price is well below the limit of $510k set by the FHFA for loans to be eligible for federal backing.  We should expect mortgage lenders to have a limited appetite for risk over coming months, and one way in which lenders mitigate that risk is by offloading conforming loans to Fannie and Freddie.

Houston has been faced with the double whammy of fighting the economic impacts of the COVID-19 virus shutdown as well as the largest collapse of the oil market in history. Houston is a metropolitan area built upon the demand for oil. As the oil market falls, so falls Houston. Houston has a Housing Tides index score of 63.8, placing it 23^rd on our list of 50 housing markets. Using the Housing Tides data, these factors influence me in picking Houston to be the slowest market to recover from the pandemic.

• The plummeting of the oil industry will only serve to drive Houston’s unemployment level even higher. This high level will continue beyond the recovery from the COVID-19 induced recession. Housings Tides data retrieved from the Bureau of Labor Statistics places Houston’s unemployment rate at 3.9%.
  
  
• Houston has a growing housing supply issue. Rental vacancies are running at 10.8% while there is approximately a 3.3 month’s supply of resale listings available in the market. Permits to Household Growth is at 1.7, while Permits to Job Growth ratio is 1.1 indicating an abundance of supply.
  
  
• Houston, however, remains an affordable market with a Price to Income Ratio of 0.21. Houston has always enjoyed this positive aspect of housing demand. However, affordability alone is not expected to overcome the expected slow employment growth with the uncertainty in the oil industry.
  
  
• A housing sentiment review of 2,506 articles that mention Houston have an average sentiment of 0.04, which is more positive than the overall national article average of -0.04. While the sentiment was trending up just a bit, I would expect that it will deteriorate in the next few months.

On the other end of the spectrum from Atlanta is the Chicago metro area, sitting at Housing Tides Index rank #35.  Here is why I believe the Chicago housing market will fare poorly in the wake of the present turmoil:

• Even before COVID-19 impacts on employment, Chicago-area job growth was tepid at best. With just 175k net jobs added in the last five years, total employment has expanded by only 3.9% -- compare this to metro Atlanta’s 325k net jobs, (+12.8%) over the same period.  Combine this with the fact that the Chicago metro experienced a net loss of 21k jobs in the last twelve months and I see a market where home construction is not supported by an influx of potential buyers.
  
  
• 56% of Chicago housing units permitted in the last three years were multi-family. It would not surprise me to see a reversal of the last decade’s consumer preference to live near city-centers, as strict stay-at-home orders in major cities remind Americans of the benefits of a detached home with a yard.  Additionally, while there was already a trend towards more people working from home offices, the trend has accelerated, and with the rapid growth in business networking tools, some think more of us will work remotely even after corporate offices reopen.  The homebuyer at the margin very well may decide that they no longer prefer that apartment downtown.