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While housing certainly got a bad rap during the Great Recession, the sector is now poised to pull the nation out of the current pandemic-fueled decline. The industry pros at HousingWire spoke with CoreLogic chief economist Frank Nothaft who outlined a compelling point-of-view based on his nearly three-decade career at Freddie Mac.
Many Americans recall all too well how risky lending practices and subprime loans spelled disaster in 2008. At the same time, years of overbuilding led to a massive oversupply of homes on the market.
But go back a little further and you’ll see that the nation’s largest asset class actually supported the economy as other sectors stumbled. “That’s what we’ve seen in past recessions, with the exception of the Great Recession,” according to Nothaft.
When the unexpected events of 9/11 led to a recession in 2001, the Federal Reserve lowered interest rates. The result? A five-year real estate boom. Consumers turned to housing as a more stable alternative to the volatile stock market.
A booming real estate market drives GDP growth in two ways: spending and homebuilding. Consumer spending (think curtains, couches, and consumer electronics for the home) drives nearly 70% of GDP growth in a typical quarter.
From job creation to demand for material, homebuilding itself is also measured as a direct component of GDP. In fact, this fixed investment category accounted for almost half a percentage point of our GDP in 2004 and 2005.
Recent dramatic action from the Fed has driven record low rates for 30-year mortgages. Lenders are gearing up for the potential demand in both new loans and refis. Millennials and more are seeing the benefits and opportunities in owning vs. renting.
While younger buyers may have been unable to make a play pre-pandemic due to the tight market, the current dynamic changes things. “With some of their prior competition knocked out by job losses, this could be their moment,” according to Nothaft.
As supply improves, homeownership and lower monthly payments will motivate many to jump into the market and make a purchase. And while unemployment is certainly a concern, housing is a need-to-have, not a nice-to-have, made emphatically clear during this time when home serves as shelter, school, and entertainment.
As we’ve reported at New Western, housing supply is at a record low. 2020 marks the end of a decade of underbuilding with homeowner vacancy (measuring share of U.S. homes vacant and for sale) at its lowest rate in four decades. Compare a 1.1% rate in the first quarter to a record-high 2.9% during the Great Recession.
Nothaft predicts home builders will really begin to “flex their muscles” this summer to address the historic shortage of homes. “Homebuilders are well positioned to ramp up and start building, given that we have an undersupply, with a very low vacancy rate,” reports Nothaft. In fact, we may begin seeing a rebound as soon as June, as markets relax restrictions.
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