As we are all too aware, the coronavirus outbreak has taken hold of the domestic and global economy. The housing market is not immune to its impact but may be in a better position than many believe. Recent data shows that weekly unemployment claims soared to a record, which will, in turn, work to depress household incomes and consumer confidence. While mortgage rates have fallen due to the economic uncertainty, potential home buyers that are confined to their homes cannot necessarily take advantage of the affordability boost.
Many still bear scars from the Great Recession and may expect the housing market to follow a similar trajectory in response to the coronavirus outbreak. But, there are distinct differences that indicate the housing market may follow a much different path. While housing led the recession in 2008-2009, this time it may be poised to bring us out of it. “This time, housing is a casualty of a public health crisis turned economic, not the cause of an economic crisis.”
The Housing Market Then Versus Now
Let’s examine several differences between the pre-Great Recession housing market and the housing market at the cusp of the coronavirus outbreak.
Housing Market is Not Overvalued: The graphic below compares house-buying power and the median sale price of a home from the year 2000 through January 2020. If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home. The only time period when the median sale price was greater than house-buying power was from 2005 through 2007, indicating an overvaluation of housing, or a “housing bubble.” Today, house-buying power is nearly twice as high as the median sale price of home, implying that housing is not overvalued, and is in fact in a much better position entering this potential recession than it was ahead of the last.
- The Housing Market is Underbuilt: Housing enters this potential recession underbuilt rather than overbuilt, a significant difference compared with the pre-Great Recession housing market. In fact, since 2009, housing demand has outstripped housing supply. In 2018 – the latest full year for which we have comprehensive data – 1.2 million households were formed, while only 860,000 units were produced, resulting in a shortage of 340,000 units. Prior to 2009, the opposite was true, as housing supply significantly outpaced demand. The limited supply of homes positions the housing market to lead the recovery, once the impact from the coronavirus outbreak fades. In fact, it’s important to remember that the housing market has traditionally aided the economy in recovering from a recession. Consumers who are less affected by a downturn are willing to buy and sell, which can help get other parts of the economy moving.
- Equity is at Historical Highs: The housing market today is not driven by liberal lending standards, sub-prime mortgages, and highly leveraged homeowners, as shown by the fact that the household debt-to-income ratio is at a four-decade low. The housing crisis during the Great Recession was fueled heavily by the fact that job losses were paired with a significant share of homeowners who had little, if any, equity in their homes. Homeowners today have very high levels of tappable home equity, providing a cushion to withstand potential price declines.
What’s the Prognosis for Housing?
Unfortunately, the service industry – hospitality, retail and leisure specifically – will likely feel the sharpest and most immediate economic pain from the coronavirus outbreak. There are over 130 million workers in the overall service sector, which accounts for 86 percent of total nonfarm employment, so job losses are expected to be high in this labor-intensive sector. Of course, the housing market will not go unscathed, as consumer confidence and a strong labor market are essential in the decision to purchase a home. Yet, this time, housing is a casualty of a public health crisis turned economic, not the cause of an economic crisis.
January 2020 Real House Price Index
In January 2020, more than a month before the coronavirus outbreak took hold in the U.S., the Real House Price Index (RHPI) confirmed the housing market’s surging momentum. Two of the three key drivers of the RHPI swung in favor of increased affordability in January. The labor market showed continued strength, as rising average hourly earnings resulted in a 2.3 percent yearly increase in household income. Additionally, compared with January 2019, the 30-year, fixed-rate mortgage fell by 0.8 percentage points. So, consumer house-buying power – how much one can buy based on changes in income and interest rates – continued to grow, boosting affordability and working offsetting the negative impact from rising house price appreciation.
As the chief economist for First American Financial Corporation, Mark Fleming leads an economics team responsible for analysis, commentary and forecasting trends in the real estate and mortgage markets. Subscribe to the First American Economic Center at FirstAm.com/Economics for weekly analysis and research or follow him on Twitter at @mflemingecon.