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Economic Outlook: Housing Will Lead an Economic Recovery

Post-pandemic market conditions are creating a formula for housing to thrive

BY ROBERT DIETZ

The United States is confronting the sharpest and most sudden economic downturn of the last century. Unlike the Great Recession, which was a financial crisis that unraveled over years and led to a significant downturn, the recession of 2020 is rooted in the government-imposed response to a biological challenge. While the data concerning the virus and COVID-19 continues to remain unclear, the aggressive public health strategies undertaken by government are unmatched since the 1918 flu epidemic.

In order to promote social distancing and slow the spread of the virus, governments have effectively shut down large sectors of the U.S. economy. This strategy places economic well-being and public health in opposition. For example, while the policy objective of reducing nonessential business activities is to help the health care system from being overwhelmed, in fact many health care institutions are cutting hours or reducing staff because of the loss of other health-related business.

This counterintuitive trade-off is a good analogy for the challenge that the overall economy faces in the year ahead. As a result of lockdowns, the near-term economic outlook is dismal. Through the end of April, 30 million people filed for unemployment. Annualized GDP growth for the first quarter was -4.8%, the largest decline since the Great Recession. And the second quarter will be worse. The NAHB economic forecast calls for a growth decline of at least -25% for the quarter, and there are some forecasts detailing a -40% annualized rate.

Looking ahead, many forecasters are calling for a sharp and quick recovery beginning in the third quarter. In contrast, the NAHB forecast sees an additional GDP decline in the third quarter due to economic disruptions related to elevated unemployment and small business financing constraints. Simply put, the economic damage from more than a month of shutdowns will linger past mid-year.

Nonetheless, provided the economy does not experience a W-shaped recovery due to new virus outbreaks next winter, the second quarter will mark the low point for the recession. As governors reopen the economy on a partial basis, layoffs will slow and business activity will expand. Markets will adapt to new expectations concerning personal interactions and crowd size. Progress will be made on a vaccine for late 2021 or early 2022 deployment, while new anti-viral medications will reduce the severity associated with COVID-19 in 2020. This will allow an economic recovery to take hold by the end of 2020 and build momentum going in to 2021.

Housing will be a leading sector in this rebound. While lending conditions for land development and residential construction will be tight, there exists previously unmet housing demand for new construction and remodeling. Based on demographic needs, the US has a housing deficit of approximately one million residences, per NAHB modeling. Freddie Mac estimates the shortage may total 2.5 million homes.

Due to this deficit, low interest rates, and recovering GDP growth, housing demand will grow. Demographic tailwinds, including a possible baby boom due to weeks spent at home, will support home building. Labor market weakness will be a limiting factor for home sales, but by the end of 2020, NAHB’s forecast calls for the unemployment rate to decline from mid-year highs in the 15% to 20% range to approximately 10%. This rate will still clearly be elevated compared to prior recessions, but the improvement from the spring will be noticeable to housing industry participants in terms of the count and interest of prospective home buyers.

The post-virus recession marketplace will present important changes for housing preferences. For example, we are forecasting that demand will increase in medium- and low-density neighborhoods as families seek to move away from high density environments that were subject to heightened public health risks. Additionally, more telecommuting flexibility from employers will enable households to accept living further away from employment centers in order to afford a home purchase.

New construction home size will trend higher to meet the increasing needs of athome office space, gyms and living space. Single-family rental housing will see a window of opportunity, as the demand for single-family structures increases but down payment and job security concerns limit the ability of some individuals to make a home purchase.

As we move further into the 2020s, the purchasing power and family size of Millennials will increase leading to more demand for newly-built single family homes. This will provide a boost to the economy because housing equals jobs. According to NAHB estimates, for every 1,000 single- family homes built, 2,900 jobs are supported.

All things considered, I have emphasized the importance of viewing the future in terms of 2-months (significant declines in economic data), the next two-quarters (stabilizing economic conditions), and the next 2-years (return to trend conditions). As this economic path progresses, the COVID-19 crisis has highlighted the importance of home for all Americans. And as such, housing will remain in the forefront of consumer decisions in the years ahead.

Robert Dietz is the Chief Economist for the National Association of Home Builders