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    Will Heightening Unemployment Ruin Housing Market?

    In the past two weeks, around ten million Americans have lost their jobs. The next unemployment rate, on May 8th, is said to be in the double digits. The current health crisis brought the economy to a sudden halt and there are many individuals who are now experiencing the financial crisis personally. The President of the Federal Reserve Bank of St. Louis, James Bullard, described the government and their hopes to help those who have recently lost their jobs and then their companies were also forced to close. Bullard recently 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.”

    That is hopeful but we are all still uncertain as to when the newly unemployed will be returning to work. 

    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 major piece of the overall economy in this country.

    Chris Herbert, Managing Director of the Joint Center for Housing Studies of Harvard University, in a post titled Responding to the Covid-19 Pandemic, addressed the toll this crisis will 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 logical 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 does not 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. Take a look at numbers 1 through 4:

    Unemployment rates and how they affect the real estate market - DeBonis Team

    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.

    The impact of the unemployment rate on home sales does not seem to be as influential as we may have originally believed. 

    Isn’t this time different?

    Yes. There is no doubt the country has not 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?

    Many believe this is going to be similar to The Great Depression. From the standpoint of unemployment rates alone (the only thing this article addresses), it does not compare. Here are the unemployment rates during the Great Depression, the Great Recession, and the projected rates moving forward:

    Unemployment Rates During Certain Economic Climates - DeBonis Team

    Bottom Line

    We have just now provided you the facts as we know them. The entirety of the housing market will have problems throughout this year. But, with the help that has been provided to those who have recently become unemployed and the idea that we are hoping for a quick recovery for the economy after the pandemic is handled. If you have any further questions, please feel free to reach out to the DeBonis Team at (951)-203-4426.

     

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