Unleashing the Economy

The pent-up demand for homes should be a boon for markets.

We’re on the upswing. In April, pending sales contracts hit their all-time lowest level during the most restrictive phase of the stay-at-home orders. Consequently, closing activity reached its bottom the following month in May. The homes that were listed then drew plenty of buyer interest. Home prices have been rising at more than a 5% annualized clip.

Keep in mind that the housing market was exceptionally strong prior to the pandemic and before the massive job losses began. In the first quarter, when the gross domestic product contracted by 4.8%, the residential investment component comprising economic activity from home sales, home construction, and remodeling activity grew by 21%. Consumer spending and business spending, by comparison, had contracted 8% and 9%, respectively.

Another noteworthy data point was the strong growth in the savings rate. Social distancing meant no trips to the shopping mall, no eating in restaurants, no vacation travel, no baseball games. With the reopening of the economy and the trajectory of new cases of COVID-19 generally falling in the spring, consumers were ready to unleash much of those savings back into the economy. Government relief programs had implementation challenges but eventually provided generous levels of aid.

New listings and new-home construction are urgently needed. Home buyers want to lock in record-low mortgage rates. They know that in five years or so, consumer prices could accelerate as a result of the government’s massive “printing” of money. Higher prices for food, tuition, health care, rents, and real estate are inevitable. The only major expenses holding steady are fixed-rate mortgage payments. And those will feel even more manageable as incomes grow.

Home sales nationally are forecast to be down only 11% in 2020, while prices should rise by 4%. In 2021, everything lights up as sales are expected to jump 15% while price growth stays in the 4% to 6% range. The demand will be there; the real question is whether the houses will be.

Getting Past the Trough

It’s been a rough few months, but property sales are moving in a better direction. As of May 17, new contracts were down 20% on a year-over-year basis, from a steep decline of nearly 40% in the last week of April. See the latest housing data from NAR.