Housing Saves the Economy

January 12, 2021
Housing Saves Economy
Home-equity levels in the U.S. might end up increasing by $3 trillion this year.


The impact of the housing market on the 2008 financial crisis couldn't have been more different than what we've seen during last year's recession. While housing acted as a strong headwind slowing the economic recovery 12 years ago, now it's looking like a tailwind that will help lift the economy as we move past the pandemic in 2021. The damage wrought to the sector after 2008 was multipronged and long-lasting. The glut of foreclosures and inventory overhang meant that very little new construction was needed for years. There was consequently minimal growth in construction employment -- a key driver of the business cycle -- coming out of 2008 until the latter part of 2012. That was one reason why the early years of the recovery felt like we were still stuck in a recession. The foreclosure crisis pushed homeowners into renting at the same time large numbers of young Millennial workers were also entering the rental market, squeezing renters at a time of high unemployment and low wage growth. A decade later, we've seen shifts in the housing market this year that could boost economic activity in 2021. Rising buyer demand combined with a shortage of homes for sale have led to accelerating price growth since the first quarter. At this point, a 10% year-over-year increase in home prices looks plausible for 2020. That means that home-equity levels in the U.S. might end up increasing by $3 trillion this year, a positive wealth effect with the additional benefit of record-low rates on home loans that allow homeowners to refinance or cash out equity. The shortage of housing inventories has led to a rapid recovery in construction jobs, with employment now down just 3.7% from its February 2020 peak. For comparison, it took until January 2019 to recover to a level that was 3.7% below the mid-2000's peak, a solid 10 years into the recovery. There's going to be no lost decade for the housing industry this time.

Source: Bloomberg