HOUSING COULD HELP LEAD THE POST-

COVID ECONOMIC RECOVERY

Thursday, May 28, 2020 | Daniel McCue

The US is clearly entering a recession and the only question is how bad it will be. US gross
domestic product fell by an annual rate of 4.8 percent in the first quarter of 2020 with a
much larger decline expected for Q2. Although it’s too soon to say how far the economy will fall
and when the slide will end, the housing industry may be poised to help lead the recovery, when it
occurs, unlike it was after the Great Recession of the late 2000s. This would be in keeping with
trends over the last five decades, when housing played a major role in the recoveries from virtually
every major downturn.

The housing industry has often led the economy out of recessions. Simply put, this is because
recessions lead to a decline in interest rates that lowers borrowing costs for both homebuyers and
builders, which makes homebuying more attractive and spurs homebuilding and the many related
durable consumer goods industries that drive GDP growth. The strong connection has been
documented by economists such as Edward Leamer, whose 2007 working paper goes so far as to
carry the title, “Housing Is the Business Cycle.”

FIGURE 1: HOUSING DIDN’T PROVIDE ITS NORMAL BOOST TO THE

ECONOMY AFTER THE LAST RECESSION

Note: Historical average is for all quarters from 1970:Q1 to 2020:Q1. 

The outsized impact of residential construction on the economy after recessions can be quantified
by tracking Residential Fixed Income (RFI), which covers spending on housing construction.
Normally 4 percent of GDP, growth in RFI averaged 18 percent of GDP growth in the year after
recessions dating back to 1970 (Figure 1). This did not happen after the Great Recession, when
RFI growth inched up to only 6 percent of GDP growth. For an explanation about what was
different last time around, economists Michael Bordo and Joseph Haubrich (2012) quote a
statement former Fed Chairman Ben Bernanke made in 2011:

Notably, the housing sector has been a significant driver of recovery from most recessions in the
United States since World War II, but this time–with an overhang of distressed and foreclosed
properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns
by both potential borrowers and lenders about continued house price declines–the rate of new
home construction has remained at less than one-third of its pre-crisis level.

FIGURE 2: VACANCIES BEGAN 2020 AT THEIR LOWEST RATES IN

DECADES
Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys.

While the steepness and pandemic-driven nature of the current downturn makes it hard to
compare with past recessions, one key difference between the Great Recession and today is
the lack of a substantial overhang of distressed and foreclosed properties, which after the last
recession needed to be absorbed before housing construction could be a driver of recovery. Such
an overhang of excess vacancies did not exist when the pandemic hit and the downturn began.
Unlike in late-2007, housing markets in early 2020 were tight for both owners and renters (Figure
2). HVS data show both for-sale inventories and rental vacancy rates were at decades-long lows
in the first quarter of 2020 (Figure 3). Compared to the fourth quarter of 2007, there were 2 million
fewer vacant housing units in 2020 even though the number of households had grown by over 12
million. Rental markets had tightened most, with 814,000 fewer vacant units compared to 7.1
million more renter households. But there were also 1.3 million fewer vacant units for sale relative
to 2007, compared to over 5.5 million more homeowner households.

FIGURE 3: RENTER AND OWNER HOUSING MARKETS ARE MUCH

TIGHTER NOW THAN THEY WERE AT THE START OF THE LAST
RECESSION

Note: Homeowner and renter vacancy rates include some units rented or sold and not yet occupied. Total vacancy rates include
seasonal and held-off-market units.
Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys.

Additionally, several measures taken to contain the pandemic’s initial outbreak such as

mandatory halting of non-essential residential construction, suspending in-person building
permitting processes, and shortages of PPE on the worksites, have slowed the pace of
construction even further. These extra-market factors could depress construction activity relative
to demand beyond what occurred in past downturns. This could mean a sharper supply response
in the eventual recovery if these restrictions are relaxed, or a more gradual response if not. Given
that several states and cities have already lifted bans on residential construction put in place in
March, it is likely that most local restrictions will be short-lived, but time will tell. Some areas may
need to retain restrictions for a while longer or even reimpose restrictions if they reopen too quickly
and infections surge. Time will also tell whether construction labor shortages will persist through
the recession and affect the ability of builders to ramp up construction, and if delinquency rates,
which jumped by 59 basis points in the first quarter of 2020, rise enough that lenders start to
tighten credit. The path to economic recovery will be tied to both market forces and efforts
necessary to address the pandemic.

Ultimately, the fact that the housing supply is without the overhang of vacant units that kept it from
taking its typical role as a driver of recovery after the last recession may tell us more about the
nature of the last recession than this one. Hopefully, what these vacancy numbers do suggest is
that, in terms of supply, housing construction is not likely to be a barrier to recovery and instead
may once again be a source of strength that helps the economy turn around once the worst is
over.

Read More About: Housing Markets and Conditions