Will Surging Unemployment Crush Home Sales?

Posted by Larry Tollen on Tuesday, April 14th, 2020 at 8:51am

Will Surging Unemployment Crush Home Sales

Ten million Americans lost their jobs over the last two weeks.

The next unemployment rate will be announced on May 8th. It is expected to be in the double digits. Due to the health crisis; the economy has essentially come to a screeching halt; and many are feeling a personal financial crisis. James Bullard, President of the Federal Reserve Bank of St. Louis, explained that the government is trying to find ways to assist both those who have lost their jobs as well as  the companies which were forced to close (think: your neighborhood restaurant). In a recent interview he said:

"This is a planned, organized partial shutdown of the U.S. economy in the second quarter. The overall goal is to keep everyone, households and businesses, whole."

While that is certainly promising, we’re still uncertain as to when the recently unemployed will be able to return to work and if their places of employment will in fact be able to reopen.

Another concern: how badly will the U.S. economy be damaged if people can't buy homes?

A new concern is whether the high number of unemployed Americans will cause the residential real estate market to crash, putting a greater strain on the economy and leading to even more job losses. The housing industry is a very significant piece of the overall economy in this country.

Chris Herbert, Managing Director Joint Center for Housing Studies of Harvard University, in a post titled Responding to the Covid-19 Pandemic, addressed the toll this crisis could have on our nation, explaining:

"Housing is a foundational element of every person's well-being. And with nearly a fifth of US gross domestic product rooted in housing-related expenditures, it is also critical to the well-being of our broader economy."

How has the unemployment rate affected home sales in the past?

It's definitely reasonable to think there would be a direct correlation between the unemployment rate and home sales: as the unemployment rate went up, home sales would go down, and when the unemployment rate went down, home sales would go up.

However, research reviewing the last thirty years doesn't show that direct relationship, as noted in the graph below. The blue and grey bars represent home sales, while the yellow line is the unemployment rate. Will Surging Unemployment Crush Home Sales? | MyKCM

 

Note the following:

 

  1. The unemployment rate was rising between 1992-1993, yet home sales increased.
  2. The unemployment rate was rising between 2001-2003, and home sales increased.
  3. The unemployment rate was rising between 2007-2010, and home sales significantly decreased.
  4. The unemployment rate was falling continuously between 2015-2019, and home sales remained relatively flat.

Our take away from this data is that the  impact of the unemployment rate on home sales doesn't seem to be as strong as we may have initally thought.

Isn't this time different?

Yes. There is no doubt the country hasn't seen job losses this quickly in almost one hundred years. How bad could it get? Goldman Sachs projects the unemployment rate to be 15% in the third quarter of 2020, flattening to single digits by the fourth quarter of this year, and then just over 6% percent by the fourth quarter of 2021. Not ideal for the housing industry, but manageable.

How does this compare to the other financial crises?

Some believe this is going to be reminiscent of The Great Depression. From the standpoint of unemployment rates alone (the primary focus of this post), it does not compare. Here are the unemployment rates during the Great Depression, the Great Recession, and the projected rates moving forward:Will Surging Unemployment Crush Home Sales? | MyKCM

Finally another factor that must be considered is that unlike the last economic crises in 2008 the housing market is under supplied rather than over supplied so that the housing market truly is not the same.

Housing will Help the Economy Recover

  • Expert insights are painting a bright future for housing when the economy bounces back and it will.
  • We may be facing challenging economic times today, but the housing market is poised to help the economy recover, not drag it down.

Bottom Line

We've given you the facts as we know them. The housing market will have challenges this year. However, with the help being given to those who have lost their jobs and the fact that we're looking at a quick recovery for the economy after we address the health problem, the housing industry should be fine in the long term. Stay safe and don't hesitate to call, text or email us with any questions you might have. My NC Homes is here for you and we will do our absolute best to give you the information you need to make smart, informed decisions.

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