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Housing Market Poised to Lead Economy Out of Recession: Economist

Last Updated September 23, 2020 1:57 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:57 PM
  • A key housing market statistic plummeted 30% to a five-year low in April.
  • Homebuyer demand appears resilient, and supply-side confidence is ticking up too.
  • A Grant Thorton economist believes the housing market will buttress the economy in a way it couldn’t in 2008.

A closely-watched gauge of housing market health collapsed to a five-year low in April as the coronavirus pandemic thrust the broad U.S. economy into complete disarray.

But at least one economist believes this sector could be the beacon that leads the U.S. out of a historic recession.

Why Economists Are Shrugging Off Ugly Housing Market Data

Federal Reserve Chair Jerome Powell warned this week that U.S. GDP could plunge as far as 30% in the second quarter  before embarking on a slow, painful recovery.

Diane Swonk, the chief economist at Grant Thornton, said on Tuesday that the housing market could be a “driver”  of that recovery. But only if lenders allow more prospective homebuyers to take out mortgages.

housing market, recession, grant thornton
Source: Twitter 

Swonk was responding to another batch of ugly data that demonstrated the startling degree to which the coronavirus pandemic triggered a homebuilding freeze.

U.S. housing started plummeted more than 30% in April  to a seasonally adjusted annual rate of 891,000 units. Homebuilding has slowed more than 40% since February, sending residential construction back to 2015 levels.

u.s. housing starts april 2020
Source: Twitter 

Building permits slid more than 20% for the month, dropping to a slightly better-than-expected 1.07 million.

The collapse in housing starts and building permits coincided with an outright implosion in homebuilder confidence.

The NAHB/Wells Fargo Housing Market Index (HMI)  crashed 42 points in April, suffering its most precipitous monthly drop ever and careening to its worst mark (30) since June 2012.

homebuilder confidence, state of U.S. housing market
Homebuilder confidence edged up following April’s historic collapse. Economists say the recovery is warranted. | Source: Trading Economics 

Homebuilder confidence has begun to tick back up, albeit slowly, printing a 37 in the May report released on Monday.

Housing Market Demand Looks as Strong as Ever

That recovery is warranted, according to Pantheon Macroeconomics Chief Economist Ian Shepherdson .

After taking a nosedive in March, Google searches for “new homes” have not only recovered to pre-coronavirus levels but have actually climbed to new yearly highs.

housing market confidence
Source: Twitter 

That’s not the only indicator that homebuyer demand remains strong.

Mortgage applications for home purchases have climbed for four consecutive weeks, while search volume for “homes for sale”  has bounced 54% off its pandemic lows.

With mortgage rates at all-time lows , it looks like a perfect storm for a swift housing market recovery that could ripple out into the broader economy.

The problem, as Swonk warns, is that homebuyers are finding it increasingly difficult to obtain financing for home purchases.

housing market credit
Source: Twitter 

Will Lenders Open the Mortgage Credit Spigots?

The Mortgage Credit Availability Index tumbled to a three-and-a-half-year low in April , the product of banks tightening their lending standards  ahead of a likely spike in loan delinquencies and defaults.

A stunning 8.16% of mortgage loans are already in forbearance , which means that roughly 4.1 million homeowners have stopped paying their mortgages amid the pandemic.

housing market credit availability
Lenders are tightening access to mortgage credit, which could inhibit the housing market’s ability to snap back to pre-pandemic levels. | Source: Mortgage Bankers Association 

Lenders have responded by raising credit score and down payment requirements. Some have even eliminated access to certain mortgage loan products.

Tight inventories have kept home prices elevated  despite the drop in credit availability, but it’s likely that new listings will bounce back as lockdown restrictions continue to ease in major metro areas.

High-end home prices have already begun trending lower . If access to mortgage credit does not improve, sellers in the lower rungs of the market could have a difficult time securing their desired asking prices too.

That threatens to transform the housing market from a driver of the recovery into a potential drag.

Disclaimer: The opinions in this article do not represent investment or trading advice from CCN.com.