21 January, 2021

Shelter, Risk and Uncertainty: Housing and Insurance in the Covid and Post-Covid Era

- Ashok Bardhan and Robert Edelstein

The COVID-19 epidemic has affected every aspect of daily activity. It has adversely impacted a wide range of economic sectors and occupations, especially those which involve face to face, proximate interaction, collective gatherings, services which need physical proximity and contact, and economic activities that require collective operations in close spaces.

The overall economy has taken a significant hit, with the 2020 forecasted GDP slated to decrease by 3.5%; as of November, there are 8 million fewer people employed than in the month of February prior to the onslaught of the pandemic; and in the month of November, there were 14.8 million people who were unable to work because the employer closed or lost business due to the pandemic, of which 12.7 million did not receive pay*.

Many sectors and occupations have suffered significant decreases in output and employment, with transportation, personal services, restaurants, hospitality, and tourism especially adversely affected. On the other hand, a number of economic activities have seen a major bump in demand and output. The most well-known, of course, is the information technology sector, which, by definition involves distanced, remote activity, both individual and collective; companies whose business models rely on online marketing and provision, e.g., E-Commerce firms; companies active in the remote supply of entertainment, media and gaming; and of course those that facilitate the entire infrastructure of online activity, from delivery to distanced learning, to Internet-based collaborative tools, such as Cisco Webex or Zoom.

HOUSING

Somewhat less known are sectors that have benefited because of specific attributes related to the spread and impact of coronavirus. The shelter in place policies have generated a dramatic increase in the “value” and importance of your ultimate refuge - your home. If most of the activities are now home-based, with a substantial part of the work that was formerly conducted at offices and workplaces, and shopping done in retail outlets now launched from home, then the “time value” of housing has surged significantly, everything else being equal**.

The following charts demonstrate how the housing market has been changing in the past few quarters during the Covid era. Many of the housing variables that reflect the

Figure 1
Figure 2

The Case Shiller Index underscores the fact that it is not just the usual urban coastal housing markets, such as the Bay Area and New York, but other urban areas as well that have surged in 2020.

Google mobility data, gleaned from cell phone locations, provides movement trends and time spent by geography across different categories of places such as retail and recreation, groceries and pharmacies, parks, transit stations, workplaces, and residential. The data shows how the number of visitors to (or time spent in) categorised places changed compared to the baseline days (before COVID restrictions), i.e., the median value from the 5-week period Jan 3 – Feb 6, 2020.

The daily data shows that the urban counties of San Francisco, Arlington county outside Washington, DC, and Queens county, New York City were some of those which had the highest increase in time spent in residential spaces. The two spikes are in April and then again in December. There’s been an overall increase ranging between 30 and 40% over baseline in terms of time and duration spent at home. Unsurprisingly, these are also the places which have experienced the largest drop in workplace visitationsranging between 70 and 90%. Indeed, the following chart shows the change in online work trends from home due to COVID-19 in the US.

Figure 3

The Covid 19 pandemic has impacted housing and mobility in another way as well. There has been an outflux of people from dense central-city environments, which were once attractive because of the many entertainment, cultural, and recreational activities available. Former urban dwellers have headed to the peri-urban, suburban and outlying suburban areas, thereby increasing both rents and housing prices in these markets. A number of former renters in cities have bought housing in these new places. As an example of the impact of urban/suburban mobility and migration, our models demonstrate that while most Bay Area and outer Bay Area housing markets, such as Sacramento moved in tandem in earlier years, in 2020 the downturn in rentals in San Francisco and the upswing in housing market metrics in places like Sacramento has been remarkably different, displaying a strong migratory impact. The following chart shows the results of the survey taken on recent homebuyers during the pandemic.

Figure 4
Insurance

At the same time, the heightened uncertainty and risk awareness regarding health has given a fillip to the demand for insurance products. Some surveys show the increase in anxiety and consumer apprehensions, as can be seen from the following chart****:

Figure 5

While the chart above shows the state of mind from survey results and Internet search queries provide information about the intentions of consumers, the table below shows people voting with their wallet. What are the products and services that people have been spending more money on, particularly relative to previous years?

Figure 6

Data show that there is a correlation between searches for both housing and insurance products, sanitation products, cleansing and medical preventative products, on the one hand, and the regions where the coronavirus spread has been particularly devastating. It’s too early to determine definitively whether risk assessment revisions have led to any change in insurance premium pricing (except in the case of automobile insurance premiums, which have been dramatically impacted negatively since driving overall has been curtailed resulting in lower claims.)

Looking Ahead

The pandemic has had many direct and indirect impacts on household behavior, occupations and economic sectors. In this blog we reflect on how the combination of shelter in place behavior in response to health risks and directives of local authorities, as well as perception of increased risk and uncertainty have caused the housing and insurance sectors to surge.

We believe that “the time value” of housing services has increased because of Covid and the subsequent shelter in place policies; on the other hand, there is increased perception of risk and perils; your Home is the last refuge in an uncertain world, and there will continue to be spillover increased demand for products that can be employed to manage, control, and mitigate risk.

While the Covid era is extending into 2021, we believe that both housing and insurance markets will display hysteresis, even as the post Covid period emerges; that is, even after the underlying cause - the Covid epidemic - subsides, many of its impacts will remain. These impacts might be manifested in pent-up demand for housing, the willingness of people to spend more on housing, everything else being equal, as well as heightened desire to purchase insurance and hedge against risk. We believe there will be a significant burgeoning demand for bundled products that straddle both Housing and Insurance. At the same time, increased data availability, ubiquitous digitization, AI augmented risk and pricing models combined with sound financial and economic theory, and a heightened focus on customer interactions will help develop new kinds of financial products –new kinds of mortgages bundled with other products, targeted insurance products and cross-risk applications. These next-generation products will plug gaps in underserved markets, provide comprehensive security and “peace of mind,” and help customer deal with risks to her home, property, family and life.

* 2 The American Time Use Survey Data show that an employed person in normal times spent between 13-15 hours in “home related” activity in a 24 hour period. In the Covid era, it should be well over 20, if not close to 24! ** level of activity of the housing market have surged in 2020 relative to 2019. These include sales, prices, days on market, offers per listing, etc***. ***The lower mortgage rates, designed to keep the economy afloat have also played a part in the increase in homeownership and housing market outcomes. ****Google Trends data show spikes in March to June 2020 for searches relating to anxiety, uncertainty and risk. Also, see https://www.cnbc.com/2020/10/14/life-insurance-sales-increase-due-to-coronavirus-pandemic.html, for accounts of double-digit increases in the number of life insurance policies sold during the Covid-19 pandemic relative to last year.