Residential construction activity: An important indicator points the way for new business growthBy Jonathan Kanarek | July 22, 2020
Among the economic effects of the COVID-19 pandemic has been a sharp slowdown in new residential construction, and in turn property/casualty insurers are likely to see the same downward trend in new business submissions. Single-family housing authorizations, which precede housing starts, declined 10.02% year over year in June 2020 and were down 3.77% month over month, according to data from the BuildFax Housing Health Report.
These trends could be contributing to a wider drop in housing inventory,1 which is driving competition among buyers, especially in the more affordable market tiers.2
According to BuildFax research, new construction activity declined across almost all major metro areas. Of the top 10 largest metropolitan statistical areas, Philadelphia and Boston experienced the steepest declines with a trailing three-month average of -49.1% and -38.2% year over year, respectively, in June. Dallas and Houston, on the other hand, experienced the only increases at 12.7% and 9.1%, respectively. The pace of recovery will likely vary by region. While it may take longer for the Northeast to kickstart new construction activity, the South is likely to see a faster rebound, generating more opportunities for new business growth in the short term.
But other housing indicators, including home builder sentiment and construction hiring, continued to recover in June, suggesting the slump in housing activity may not last long. As COVID-19 restrictions begin to relax in the next phase of the pandemic, it’s important for property/casualty insurers to monitor the rebound in regional housing activity so they can be prepared for new business opportunities.
Existing home maintenance may be stabilizing
Maintenance activity, which reflects upkeep of the existing U.S. housing stock, is another key indicator to watch. This indicator remained flat at 0.22% year over year, an indication that existing housing activity may be stabilizing after steep declines in the past couple of months. If single-family housing authorizations follow a similar pattern to existing housing activity, which experienced its steepest drop just two months ago, there’s a chance new construction could stabilize in the fall.
While a few months of delayed maintenance typically isn’t highly detrimental, it may make the housing stock more vulnerable to an above-normal hurricane season, such as is forecast in 2020 by the National Oceanic and Atmospheric Administration.3 Furthermore, as some insurers may have temporarily relaxed underwriting guidelines amid the pandemic, reassessing risk will become increasingly important at renewals. This is not only to confirm properties are insured to value, but also that potential hazards have been identified.
The long view on housing and insurance
The effects of COVID-19 on housing and property/casualty insurance may go beyond the immediate economic implications of lockdowns and social distancing. Some urban dwellers are reported to be rethinking their entire lifestyle in light of the vulnerabilities exposed by the pandemic,4 which may drive an increase in demand for suburban and rural housing.
And in time, job losses may lead to an uptick in foreclosures as lender accommodations, driven by government mandates and voluntary actions of financial institutions, begin to be exhausted. Mortgage delinquencies can drive changes in property condition—for the worse—as financially stressed homeowners postpone maintenance, and then, following foreclosure, the condition of the vacated home may begin to deteriorate.
Verisk stands ready with expertise, experience, and forward thinking to help property/casualty insurers navigate the “new normal” of the pandemic and its aftermath.
- Michael Hyman, “May 2020 Existing Home Sales,” National Association of Realtors, June 23, 2020, < https://www.nar.realtor/blogs/economists-outlook/may-2020-existing-home-sales >, accessed on July 2, 2020.
- Lily Katz, “Prices of Affordable Homes Have Jumped 5.5% During the Pandemic,” Redfin, June 26, 2020, < https://www.redfin.com/blog/most-affordable-homes-us-getting-more-expensive/ >, accessed on July 2, 2020.
- Busy Atlantic hurricane season predicted for 2020, National Oceanic and Atmospheric Administration, May 21, 2020, < https://www.noaa.gov/media-release/busy-atlantic-hurricane-season-predicted-for-2020 >, accessed on June 8, 2020.
- Richard Morgan and Jada Yuan, “Frustrated and struggling, New Yorkers contemplate abandoning the city they love,” The Washington Post, May 26, 2020, < https://www.washingtonpost.com/national/frustrated-and-struggling-new-yorkers-contemplate-abandoning-the-city-they-love/2020/05/25/153ca71e-9c5b-11ea-a2b3-5c3f2d1586df_story.html >, accessed on June 15, 2020.
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