Economists tracking the sector follow a thumb rule: for the construction of every 100,000 homes, the economy gets a 0.3 percent boost.
While people left job opportunities in large cities in a disarray due to the pandemic, housing companies were faced with a near-perfect storm. The magnitude of the pandemic’s impact was large enough for people to move from ‘big cities’.
Suddenly, everything changed. As people started moving to suburban locations, demand for housing got a shot in the arm. The muted sentiment around housing soon gave way to opportunities in smaller towns from where people could work from home. In the stock markets, tech stocks were riding high on optimism. They soon had housing stocks for company.
The data tells the story. The numbers for housing starts jumped in July against June by 22.6 percent, seasonally adjusted at an annual rate of 1.49 million. Existing home sales are also confirming the trend, up 24.7 percent.
As suburban demand drives construction activity, confidence among home builders is showing. The housing market index, at a reading of 78 in August against 72 in July, is at its highest in its 35-year history. Increased demand for single-family homes, low interest rates and a noticeable suburban shift in housing demand to suburbs are the key drivers.
For example, real estate sales have taken a hit in San Francisco while demand in its suburbs it is seeing an increase. While some house hunters are looking for homes in the suburbs of major cities others have chosen to move to smaller towns.
Economists tracking the sector follow a thumb rule: for the construction of every 100,000 homes, the economy gets a 0.3 percent boost. Hiring may have slowed and the manufacturing sector is also slowing. The markets are betting that the spin-off benefits of increasing housing activity will spill on to other sectors and stoke demand.
Retailers steal the show
While Americans are renting and buying apartments in suburbs, they have not put a complete freeze on spending. While companies like Home Depot were the obvious beneficiaries of the boom in home construction activity, Walmart, Target, Costco, Amazon, Lowe’s and others too reported sales that were better than market expectations.
Lowe’s, for instance, reported same store sales growth over 35 percent and Target over 20 percent. Some believe that it could see the beginning of a new trend among American consumers. As their spending dried up in areas like travel and entertainment, including dining out, they had enough to spend beyond their everyday needs.
The discretionary spend among consumers has so far been confined to improving their homes so that they could carry out their work or learning better.
Retailers linked to malls were the clear underperformers during the quarter. TJX Cos (TJX), for example, said that sales could fall nearly 20 percent for the full year. Best Buy (BBY) reported a 5 percent growth in same-store sales but its growth could run out of steam for the full year.
While the retailers have been some of the biggest beneficiaries, others like FedEx are now making their move. Last week it announced a surcharge on regular shipments to homes between November and mid-January 2021. After rival UPS made its move, it is the first time since 2016 that such a peak season fee is being levied.
Retailers are also hoping for another stimulus cheque for the Americans. With the earlier cheques now running out, another one could give a big boost to spending and support consumers.
Until the stimulus cheque arrives, retailers will be keeping their fingers crossed that the consumer spending does not slow down.
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