SALT LAKE CITY — At the beginning of 2020, Utah housing experts were predicting the median home price in Salt Lake County would top $400,000 for the first time.
Now three months after the state first shut down businesses in the face of the COVID-19 pandemic, one economist is rethinking those rosy metrics from the state’s once red-hot economy.
“The COVID-19 recession will cut residential construction and existing home sales by 8% to 10%, depending on the type of housing,” James Wood, Ivory-Boyer senior fellow at the University of Utah’s Kem C. Gardner Policy Institute, said.
Writing in a Policy Institute blog post, the tenured professor and respected economist of 40 years said he has never seen economic conditions as uncertain and fast-moving as the COVID-19 market due to the extreme volatility expected in Utah’s job market over the next several months.
In January, Wood issued his annual forecast for the Salt Lake metro area housing market predicting the median sales price of a single-family home in Salt Lake County would rise to $400,000 for the first time, while the median price for condominiums/town houses would climb 10% this year and possibly reach the $300,000 milestone sometime next year.
Now, an unforeseen historic event has created turmoil and resulted in the reexamination of the economic picture for the area and what impact the pandemic will have on housing along the Wasatch Front in the second half of 2020.
“The good news is that in the second half of the year employment growth returns, bringing the 2020 annual employment estimate to 1,529,000 jobs, down only 31,000 jobs from 2019,” he said. “The unemployment forecast for 2020 is 5.3% — much lower than the peak unemployment rate of 8.1% during the Great Recession.”
His housing forecast assumes job recovery by the fourth quarter, which also assumes the economic recovery will be preceded by near containment of COVID-19 through testing, treatment and isolation of cases, however, much uncertainty remains regarding the virus, he said.
Uncertainty in the existing homeownership market due to the pandemic is expected to create challenges for buyers and sellers, Wood said, but stability in the financial markets will help mitigate some of that ambiguity with mortgage rates still at historic lows.
“The performance of the residential real estate market in 2020 comes down to whether economic uncertainty offsets the advantage of low interest rates,” he said. “A share of both potential buyers and sellers will feel it’s to their advantage to wait six to 12 months before entering the market, while others will see the current market as a buying opportunity. “
He noted that job losses could significantly reduce second quarter demand from prospective homebuyers, but demand should pick up as the economy recovers during the latter half of the year. He said sales of existing homes, condominiums and townhomes will likely finish down about 10% from last year’s sales total of 48,184 units.
“Single-family construction will be least affected with only a 5% decline, while the numbers of building permits issued for apartments and condominiums as well as the sales of existing homes are expected to decline by 10%,” he said.
Despite the diminished demand, home prices will continue to increase, but at a slower pace, Wood said. The dearth of available properties will put increasing pressure on sales prices, he added, with the statewide median price of a residential property — single-family house, condominium or town house — increasing by approximately 5% to $336,000 for the year.
One of the state’s largest homebuilders has been able to maintain its construction plan for the year, despite a significant decline in sales in what is typically its most profitable time.
“Year over year, we are actually up about 6.5% in terms of sales over last year thanks to a strong start to the year and the rebound we’ve seen in the market,” said Michael Parker, marketing and public affairs vice president for Ivory Homes. “That’s with a nearly 40% dip in April, which is usually our best month. But again we’ve had a rebound of being up 20% year over year in May, and June is tracking to be our best month of the year, so we’re encouraged and surprised by the strong rebound in the market at every segment.”
He added that while Ivory Homes has kept its construction flow even, other local builders may have slowed. Parker noted that the company was able to sustain its construction schedule in the midst of the pandemic by reacting as swiftly as it could to institute safety protocols that allowed for a secure work environment.
“We did — within our construction business — move quickly to make sure all of our (subcontractors) and suppliers had proper protection and the right, relevant information,” he said. “So if you entered one of our construction sites, you saw that we had everything for the guidelines out early and posted in several languages across our construction sites.”
Like other companies in the industry, Ivory Homes simply reacted while trying to get a feel for where the market was headed in that moment before making any decisions needed to keep the business going, he added. Even though sales fell dramatically in March and April, there was a concerted effort to maintain the planned level of construction in order to meet the demand in the previously strong housing market.
“We were intentional to keep our construction side of things going. Our subs and suppliers are all micro-small businesses — they’re usually one to five employees,” Parker said. “If we pull back, it’s (a) big (impact) for their business and it was important for us — as we could — to start to feel things out to keep things going as normal.”
He said fortunately the local housing market seems to be bouncing back in a robust fashion, he said.
“We have a lot of confidence in the Utah market. Our state is facing a housing shortage, so that was a dynamic that may be unique to our market that others don’t (have),” Parker said. “So we knew there would be some form of demand.”
Nationally, home construction rebounded 4.3% in May after steep declines caused by shutdowns due to the coronavirus, according to the Associated Press.
The U.S. Commerce Department reported Wednesday that new homes were started at a seasonally adjusted annual rate of 974,000 last month after steep declines in April and March. Compared with last year, however, construction activity across the nation remains 23.2% below last year’s pace.
While single-family construction has been impacted to some degree, Wood said the cost to rent in Utah is likely to decrease due to tenants being forced to relocate because of income and job losses. Some individuals and families will “double-up” with friends and family to reduce living expenses, he said.
After averaging annual increases of 5% for several years, Salt Lake County rental rates will be interrupted in 2020 as rents flatten or possibly decline 3% to 4%, he predicted.
“The rental market is bound to see higher vacancy rates. Over the last four or five years, the vacancy rates in Wasatch Front markets have consistently been below 4%,” he explained. “In recent months, however, rates had started to move higher due to the completion of several new projects. The increasing supply of rental units, combined with a rising unemployment rate, will put pressure on the market and inevitably push vacancy rates higher.”
Wood noted that through expanded jobless insurance benefits, the Coronavirus Aid, Relief and Economic Security Act will help protect many landlords and renters, at least temporarily. With current vacancy rates across the Wasatch Front hovering between 5% and 6%, he forecasted rates to inch up 1 or 2 percentage points as completed projects are slow to fill new units and tenants are forced to move out of already existing rental projects.