How the Housing Sector Has Been Impacted by the Economic Slowdown

Episode Summary

Executive Summary: Terry Haggerty argues COVID-19 caused a sharp near-term pause in housing and building products, but did not break the sector’s long-term fundamentals. He highlights millennial demand, low housing supply, strong consumer balance sheets, and solid company liquidity as reasons for recovery, while noting a likely shift toward suburbs, remodeling, and more home technology.

Main Topics: Pre-COVID optimism in housing and building products: Before the pandemic, CEOs were bullish due to millennial demand, underbuilding since the financial crisis, and an aging housing stock that should have supported both new construction and repair/remodel activity. COVID-19 shock and near-term sector slowdown: The crisis sharply reduced homebuilding and discretionary repair spending, with March starts down significantly and April expected to be worse, though construction remained essential in many states. Why this downturn differs from 2008: Haggerty emphasizes lower housing supply, healthier consumer leverage, and stronger corporate balance sheets compared with the financial crisis, arguing the sector is under stress but not structurally broken. Capital markets, M&A, and private equity: Deal activity has paused, private equity activity is delayed by financing constraints, and management teams are focused on liquidity and employee safety rather than transactions. Potential policy support from infrastructure spending: An infrastructure bill could benefit construction broadly, but timing is uncertain; he sees little chance before the 2020 election and greater odds of action in 2021. Longer-term behavior shifts in housing demand: The pandemic may accelerate suburban migration, work-from-home adoption, and a stronger renovation cycle, especially outdoor living improvements. Technology and the connected home: He expects continued, possibly accelerated, adoption of home technology, off-site construction, and innovative materials, though big tech firms likely drive the connected-home ecosystem.

Key Arguments: Millennial household formation and aging housing stock were set to drive housing and remodel demand before COVID-19. COVID-19 caused an immediate pause because housing and major remodels are discretionary and consumers are uncertain. The March new-home-start decline signals a material near-term hit, but demographic tailwinds should still support a recovery. This downturn is not like 2008 because there is no housing oversupply and household leverage is lower. Public homebuilders and building-products companies are better positioned because balance sheets and liquidity are strong. M&A is on hold, and PE financing depends on leverage markets that may take time to reopen for sponsor-style deals. Activism is likely delayed because investors and managers are focused on health, safety, and liquidity. The crisis may push more people toward suburbs and remote work, boosting homeownership and remodeling demand. Technology adoption in housing should continue through materials innovation, smart-home features, and more efficient construction methods.

Data Points: Median age of home buyer in 1985: 32 - Used to illustrate how homebuying has shifted toward older ages over time. Median age of home buyer today: 47 - Shows delayed homeownership and the later emergence of millennials as buyers. Millennial population: 70 million Americans age 20 to 40 - Described as the cohort entering the key homeownership age band. Homeownership rate shift for this age band: ~30% to ~65% - Estimated homeownership increase as millennials age into typical buying years. March new home starts: down 20% - First clear data point showing the impact of COVID-19 on construction. Home builders’ stock performance: down about 50% - Average decline cited for homebuilders in the equity market during the crisis. Building products manufacturers’ stock performance: down 35% - Average decline cited for product manufacturers in the equity market during the crisis. Household debt to GDP in 2008: about 85% - Used as a benchmark for consumer leverage during the financial crisis. Household debt to GDP today: about 65% - Supports the argument that consumers are in stronger shape now than in 2008. Podcast recording date: April 20, 2020 - Timing of the discussion and its market outlook. S&P bottom timing reference: a few days after Lenar’s March 19 earnings call - Gives context for the peak-uncertainty period in markets.

Pivotal Quotes: "COVID-19 has dramatically impacted really every end market, and construction is no different." — Terry Haggerty: Summarizing the immediate sector-wide effect of the pandemic. "COVID-19 hasn't fundamentally changed the sector." — Terry Haggerty: Explaining why he remains constructive on long-term housing fundamentals despite the downturn. "This is a health crisis more than a financial crisis." — Terry Haggerty: Distinguishing the current environment from 2008 and explaining why activism and investor behavior differ.

Implications: Near term, housing, remodeling, and M&A stay under pressure; longer term, demographics, lower leverage, suburban migration, and technology adoption could support a stronger housing and building-products recovery in 2021 and beyond.