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June 2020

Housing could lead post-pandemic economic recovery

June 5, 2020

With the likelihood of a recession looming, a Harvard researcher believes the housing industry may be poised to help lead the post-COVID economic recovery.

Daniel McCue, a senior research associate at Harvard's Joint Center for Real Estate Research, acknowledged it's too soon to say how far the economy will fall and when the slide will end. Unlike after the Great Recession of the late 2000s, he expects housing will play a major role in reversing the downturn. "This would be in keeping with trends over the last five decades," he stated in a report in "Housing Perspectives," a JCHS publication.

McCue credits a decline in interest rates that typically occurs during recessions. That lowers borrowing costs for both homebuyers and builders, which makes homebuying more attractive and spurs homebuilding and the many related durable consumer goods industries that drive GDP growth.

In his report, McCue quotes remarks former Fed Chairman Ben Bernanke made in 2011 to explain why housing failed to lead GDP growth after the Great Recession:

Notably, the housing sector has been a significant driver of recovery from most recessions in the United States since World War II, but this time-with an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines-the rate of new home construction has remained at less than one-third of its pre-crisis level.

The steepness and pandemic-driven nature of the current downturn makes it hard to compare with past recessions, McCue noted. "One key difference between the Great Recession and today is the lack of a substantial overhang of distressed and foreclosed properties, which after the last recession needed to be absorbed before housing construction could be a driver of recovery," he explained.

Included in his report was a chart contrasting both renter and housing markets now versus the start of the last recession. A second chart using US Census Bureau Housing Vacancy Surveys shows vacancies began 2020 at their lowest rates in decades.

Measures taken to contain the pandemic's initial outbreak, such as halting non-essential residential construction, shortages of PPE on the worksites, and suspension of in-person building permitting processes have slowed the pace of construction. Construction labor shortages could persist and hamper the ability of builders to ramp up homebuilding. Reimposed restrictions in areas that reopened too quickly could also restrain homebuilding.