PAST RECESSIONS MIGHT OFFER

LESSONS ON THE IMPACT OF COVID-19

ON HOUSING MARKETS
Monday, April 27, 2020 | Alexander Hermann

The COVID-19 pandemic has shut down large swaths of the nation’s economy, affecting the day-
to-day lives of millions of households. Housing markets, like nearly every sector of the economy,
will not be spared. Demand for housing will likely soften as unemployment grows and household
incomes decline. Moreover, thousands of homes have already been pulled off the market,
affecting both potential buyers and sellers. Fewer housing units will also be produced in the short-
term, possibly impacting housing affordability over the long run.

But what we know to date is preliminary, as key housing market indicators – on housing
construction, sales, prices, inventory, and more – begin to trickle out. On a seasonally adjusted
annual basis, for example, new housing starts declined 22 percent in March from the prior month.
While such monthly data is volatile and susceptible to future revisions, this is the largest one-
month decline since the mid-1980s. Likewise, new home sales declined 15 percent last month.
Unfortunately, we won’t know the full picture of COVID-19’s effect on housing markets until long
after the virus is contained. But to get a sense of where the market could be headed, and what
might be in store during the eventual recovery, we can consider both historical and global
contexts to gain important insights.

According to our tabulations of data from the National Bureau of Economic Research, there have
been eight recessions since 1960. From peak to trough, these recessions have lasted nearly four
quarters on average. The longest, during the Great Recession, lasted six quarters. Declines in
housing production and new home sales occurred in all prior recessions. In data going back to
1960, year-over-year housing starts fell by an average of 20 percent in quarters with a
recession (Figure 1). In data going back to 1970, new home sales declined 15 percent on
average during recessions. Likewise, in recessions since 1980, real home prices declined 5
percent year-over-year, on average, with annual declines in all but one recession (the recession
beginning in 2001).

FIGURE 1: IN RECESSIONS, HOUSING STARTS AND HOME SALES,

IMPORTANT DRIVERS OF ECONOMIC GROWTH, DECLINE
SUBSTANTIALLY
Notes: Home prices are adjusted for inflation using the CPI for All Items Less Shelter. Recessions are calculated from peak to
trough.
Source: JCHS tabulations of US Census Bureau, New Residential Construction and New Residential Sales data; National Bureau of
Economic Research, US Business Cycle Expansions and Contractions; Freddie Mac, House Price Index; US Bureau of Economic
Analysis, National Income and Product Accounts.

The magnitude of these changes has varied considerably. During the Great Recession, for
example, quarterly housing starts were down as much as 43 percent year-over-year in one
quarter, home sales dropped 40 percent, and real home prices fell by 14 percent (Figure 2). In
contrast, home sales actually rose steadily during quarters with a recession in 2001. During that
period, real home prices never fell and annual housing starts declined as much as 5 percent early
in the recession before rebounding quickly, averaging nearly 4 percent growth.

FIGURE 2: HOUSING MARKET ACTIVITY DECREASES BEFORE AND

DURING RECESSIONS

Notes: Housing starts, home sales, and home price data are four-quarter trailing averages. Home prices are adjusted for inflation
using the CPI for All Items Less Shelter. Recessions are calculated from peak to trough.
Source: JCHS tabulations of US Census Bureau, New Residential Construction and New Residential Sales data; National Bureau of
Economic Research, US Business Cycle Expansions and Contractions; Freddie Mac, House Price Index.

Unlike the current downturn, housing production usually softened before previous recessions even
began. Indeed, housing is often thought of as a leading indicator of economic activity. In the two
quarters prior to the last eight recessions, housing starts were down 16 percent on average from
the prior year, while new home sales declined 19 percent (Figure 3). All the while, gross domestic
product (GDP) – both real and nominal – continued to grow. Looking at each recession individually
since 1960, housing starts were already declining on average in the two quarters prior to each
recession, up to a 25 percent decline preceding 2008. Likewise, new home sales over this period
decreased before all but one recession (2001), including between 15 percent prior to 1970 and 30
percent prior to 2008. Declines in both measures were common going back at least six quarters
prior to recessions.

FIGURE 3: HOUSING STARTS AND HOME SALES DECLINE IN THE

QUARTERS LEADING UP TO RECESSIONS EVEN AS GDP RISES

Notes: Home prices are adjusted for inflation using the CPI for All Items Less Shelter. Recessions are calculated from peak to
trough. Quarters prior to the recession in 1981 are not shown. There are only two quarters of annual changes in housing starts prior
to 1960. The recession in 2020 assumes a start in the first quarter, and this is the average annual change in the last two quarter of
2019. Changes prior to all recessions do not include data from the assumed 2020 recession.
Source: JCHS tabulations of US Census Bureau, New Residential Construction and New Residential Sales data; National Bureau of
Economic Research, US Business Cycle Expansions and Contractions; Freddie Mac, House Price Index; US Bureau of Economic
Analysis, National Income and Product Accounts.

Illustrating the unprecedented suddenness of the current slowdown, housing production was
picking up before the pandemic hit the US. Housing starts and home sales were at cycle highs
late last year, reaching their highest points since the mid-2000s. Indeed, over the past two
quarters, housing starts climbed 13 percent on average while new home sales increased 19
percent. With respect to these housing market indicators, the current downturn most closely
resembles the recession in 2001, when declines in housing market activity weren’t nearly so
severe. Before 2001 housing starts declined just 5 percent and new home sales actually
increased 8 percent on average in the preceding two quarters. The resulting downturn wasn’t
especially long or severe, with GDP, housing starts, and home sales all chugging along modestly
(on average) even during the downturn.

Despite some similarities to 2001, however, the economic slowdown this year is unlike any recent
US recession. Over the past six weeks, nearly 27 million initial unemployment claims have been
filed across the country. By contrast, it took exactly 52 weeks to reach that number of claims
following the recession in 1981 (Figure 4). It took over a year in all other recessions over the past
four decades, including 63 weeks in the aftermath of the 2008 recession. In any case, the pace of
job losses in the US is unprecedented in the post-war era. The closest parallels are likely other
global pandemics. According to an analysis from Zillow, following the SARS outbreak in Hong
Kong in February 2003, home sales fell 33 percent below projected levels by May. However,
transactions (as well as unemployment) recovered to normal by July of the same year, when the
virus had largely been contained. But that return to relative normalcy depended largely on
containment of the virus.