Thanks Delta! BofA slashes their outlook for the economy

The worst of the coronavirus pandemic may be receding into the rear-view mirror, but office workers are little closer to returning to their desks full-time.

The spread of the delta variant has forced many U.S. employers that had been hoping to get staff back to their desks after Labor Day to delay those plans until at least October—or even next year. 

This led Bank of America economists on Friday to cut their forecast for third quarter growth in the U.S. to 4.5 percent, a big drop from the 7 percent previously expected.

This downward revision follows the Census Bureau’s weaker than expected report on July retail sales, a move which had been anticipated by the bank’s credit and debit card data showing weakening consumer spending.

Economists Michelle Meyer and Alexander Lin wrote in a note to the bank’s clients that consumers had likely cut back on spending because of fear of the Delta variant, supply-side constraints that had made some products unavailable or pricey, and a rise in “precautionary savings” by households wary of what the future holds.

“We think the Delta variant is a large reason for the soft patch as can be seen by the pullback in spending on leisure services,” they write. “But we also have to consider the possibility of more permanent supply-side constraints and greater precautionary savings.”

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While the Delta variant is wreaking havoc on the global economic stage, it may have boosted housing market potential, according to a blog post from Mark Fleming, the Chief Economist of First American.

“Housing market potential strengthened in July, according to our Potential Home Sales Model, increasing 1.3 percent compared with June,” writes Fleming. 

“It is now nearly 16 percent higher than in July of last year, when the housing market’s summer rebound began, following the initial pandemic-driven decline in the spring,” he added.

The bump in housing market potential can primarily be attributed to a decline in mortgage rates and an uptick in household income, both contributing to higher house-buying power, Fleming notes.

Five of the six elements of the First American Potential Home Sales Model swung in favor of increasing market potential, but these were partially offset by an increase in the average length of time people live in their homes and subsequent limiting impact on housing supply negatively influencing market potential.

However, Fannie Mae downgraded its forecast for single-family home sales through the second half of 2021 due to ongoing inventory and supply chain constraints. 

On a full-year basis, the Fannie Mae Economic & Strategic Research Group expects total home sales of 6.66 million, down from last month’s projected 6.71 million – which would still represent a 3.1% increase compared to 2020.

Due to recent declines in long-term interest rates, the ESR Group projects the refinance share of mortgage origination activity to be 58 percent in 2021, up from the projected 56 percent last month, before falling to 41 percent in 2022. Further, home prices, as measured by the FHFA Purchase-Only Index, are expected to rise 14.8 percent in 2021.

“While the recent surge of COVID-19 cases appears to be affecting consumer behavior, the economic response so far has been modest compared to last year’s outbreak, and its impact on our latest forecast is similarly slight, albeit to the downside,” said Mark Palim, Fannie Mae Vice President and Deputy Chief Economist.

“For the housing market, at current case levels, the lack of inventories of homes for sale and continued supply chain bottlenecks experienced by homebuilders remain the primary constraints on home purchase activity,” Palim adds. “Moreover, while mortgage rates have drifted downward and in theory provide greater purchasing power to potential borrowers, in practice, given current supply-side and affordability challenges, we expect that benefit to be limited.”

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Even as the Delta variant delays a return to work, many employers may not require all employees to return (as Rise&Shred mentions, often) and, as a result, offices may not return to strong demand in some markets.

Add to that backdrop a housing affordability crisis, and interest in converting empty offices for residential use seems only natural.A bill introduced in Congress in July, the Revitalizing Downtowns Act, shows the appeal of that idea. 

The legislation, from Sens. Debbie Stabenow and Gary Peters with their fellow Michigander Rep. Dan Kildee, would create a new 20% tax credit per year to help cover about a fifth of the costs of converting office buildings to residential, commercial or mixed-use properties. Residential conversions would be required to incorporate affordable housing. 

“As our workplaces change because of the COVID-19 crisis, we will see more unused buildings in our downtowns. Converting these buildings to residential and mixed-use properties will benefit families and our cities,” Stabenow said in a release. 

“It’s a really interesting idea and certainly worthy of pursuit,” said Buzz Roberts, president of the National Association of Affordable Housing Lenders. “Clearly there’s great need for affordable rentals, but there are existing resources for that. The question is, are those tools workable or do we need more?”

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