Eakinomics: Housing and the Recovery

Eakinomics: Housing and the Recovery Over the period from 2016 to 2019, the homeownership rate in the United States rebounded from 63.5 percent to 64.9 percent, a remarkably sharp rise over a short period. (These data, and much, much more, are found in the latest AAF Housing Chartbook, maintained by Thomas Wade.) Despite this rise, in 2018 and 2019 residential construction was a net drag on overall economic growth. Toward the end of 2019, however, the tide shifted. Residential construction rose at an annual rate of 4.6 percent in Q3 of 2019, 5.8 percent in Q4, and a powerful 19.0 in the first quarter of 2020. Construction got knocked down in Q2 of 2020, along with every other component of aggregate spending. But there were signs after the April downdraft that housing might come back quickly. Did it ever! The most recent high-frequency data have been quite strong. New home sales were up 13.9 percent from June to July 2020, and 36.3 percent above July 2019. These sales feed into incentives to build, with housing starts up 22.6 percent in July over June, and 23.4 percent over July 2019. Finally, building permits went up 18.8 percent in July and are 9.4 percent above July 2019. These would be striking numbers in any event, but they are particularly so in the midst of a pandemic recession. Part of the explanation is that housing markets are simply very tight and tightening. The vacancy rate for owner-occupied housing was an already-low 1.1 percent in June; it fell to 0.9 percent in July. Rental vacancy is now at a rate of 5.7 percent, down from 6.6 percent in June. (Moreover, at least so far, these occupants are still paying their bills – the delinquency rate in the residential sector is 2.49 percent in Q2 2020, up a tad from 2.37 in Q1.) On top of all of this, there is anecdotal reporting of relocation out of center cities in response to the pandemic. A strong housing market is a real plus for the recovery. Building new homes is an outdoor activity, less prone to virus-related shutdowns than other production. And building a new home also means filling a new home with appliances, flooring, furniture, and other durable goods, thus feeding the demand in other sectors. Keeping an eye on the housing sector is one way to assess the pace of recovery in the second half of 2020.