WMA Headlines September 2021

September 7th, 2021 by Nathan Hobbs

Farther to Go: With Effects of COVID Lingering, More Challenges Lie Ahead

By Dennis Berry

As the calendar turned from 2019 to 2020, little did most of us know how life was about to change. There were even days, early on, when we didn’t know if our industry would be deemed unessential and forced to close. Meanwhile, much like the months and years immediately following the tragic events of September 11, 2001, we saw a “nesting” process that brought families home. But no one ever expected the magnitude of the outcome. Among big box retailers, it was like turning on a fire hose, as DIY sales accelerated rapidly. Even more amazing was the durability of the sales pace. COVID-19 brought with it a worldwide challenge in the supply chain for building materials that has become even more complicated with time.

Unintended Consequences

There are many elements of both federal and state responses to COVID-19 that we could argue were counterproductive for the economy, but none is more evident to even a casual observer than the unprecedented unemployment compensation benefits. As of the latest reported data, there were 9.88 million people on the official unemployment role. At the same time, there were job listings totaling more than 9.2 million. Certainly not all those jobs align perfectly with the nine million that are registered as looking for work, but many of the unemployed could take a “less than desirable” position, even temporarily, versus drawing unemployment.

The answer apparently lies in another question: Why work for $600 per week when you can get that on unemployment? Thankfully, as I write this, many states have acknowledged this reality and have weaned themselves off federal unemployment subsidies.

Despite detrimental government policy decisions, the U.S. economy began bouncing back long before anyone thought possible. That said, there are still many challenges and the normal set of unknowns for those of us in the “housing” industry. What will housing starts be? I won’t wager a guess. But the good news, at this point, though, is that there is not an excess of new or existing housing inventory. What about the repair and remodel market? If history is any indicator—and it usually is—the “nesting” process created by the pandemic will continue to hold.

The normal favorite indicator for housing health tends to be interest rates. When looking at the current 30-year mortgage rate, which stands at less than 3%, I shudder to think what would happen to home values, were we ever to see interest rates repeat what I experienced in 1980, when the 30-year fixed rate topped out at 18.4%. Today’s monthly payment on a $300,000 mortgage is about $1,200. At 18.4% it would be more than $4,600. That would devastate home values.

What drove those rates in 1980? In a word: inflation. Our industry tends to be impacted more than average when inflation strikes. In my opinion, without question the enormous levels of deficit spending in 2020-21, on top of self-induced lower levels of productivity, is the perfect formula for high inflation. The prices of most products and services are rising and it’s not by just a little, and it’s not simply the cyclical commodities-related increases.

We can’t stop what has happened already, but we can fight for more responsible government spending policy going forward. In the meantime, we must be ready to adjust our businesses to weather the potential inflation storm headed our way.

Dennis Berry is senior vice president of NHC for The Empire Company and past chairperson for WMA.
berryd@empireco.com

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