Covid-19 caused a recession. So why did the housing market boom?

The Covid-19 pandemic has had a devastating impact on the United States, plunging the country into a recession and leaving millions of Americans unemployed and struggling to make ends meet. However, amidst this crisis, the...

The Covid-19 pandemic has had a devastating impact on the United States, plunging the country into a recession and leaving millions of Americans unemployed and struggling to make ends meet. However, amidst this crisis, the housing market has experienced an unexpected boom.

Between September 2019 and September 2020, homeowners in the US accumulated a staggering $1 trillion in additional home equity. This surge in demand, coupled with a historically low supply of housing, has led to a fierce competition among buyers, driving home prices to record highs.

While this boom may be good news for homeowners, it is a cause for concern for those who are being shut out of the housing market altogether. According to a recent report by the Urban Institute, if current trends continue, the US homeownership rate is projected to decline to 62.1 percent over the next two decades, with younger people and Black Americans being disproportionately affected.

So why is the housing market booming despite the recession? There are several factors at play.

How Covid-19 affected the demand for housing

Across the country, housing prices have been rising rapidly. The S&P CoreLogic Case-Shiller National Home Price NSA Index shows that in November 2020, housing prices had increased by 9.5 percent compared to the previous year. The average home value, which was around $245,000 at the end of 2019, has now exceeded $266,000.

The demand for housing is closely tied to supply and demand dynamics. When there is a limited supply of homes available, buyers are willing to pay higher prices to secure a property. On the other hand, when fewer people are looking to buy a home, prices tend to drop due to decreased competition. In the case of Covid-19, both supply and demand have been affected.

According to Daryl Fairweather, Redfin's chief economist, the increase in home values is primarily driven by demand. With mortgage rates reaching record lows, many people are seizing the opportunity to buy a home at a more affordable cost. Lower mortgage rates mean lower borrowing costs, making homeownership more accessible to a wider range of buyers.

The data supports this trend, with mortgage applications for new home purchases increasing by 33 percent compared to the previous year. Additionally, the time it takes for a home to sell has significantly decreased, with the typical home selling in just 16 days in September. It's worth noting that a significant number of buyers made offers on houses they had never seen in person, underscoring the urgency and competitiveness of the current market.

The pandemic has also shifted people's preferences, leading to a surge in demand for more spacious suburban homes. As remote work became more prevalent, many individuals and families sought larger homes with yards and extra space to accommodate remote work and virtual schooling. This shift, dubbed the "Great Reshuffling" by Zillow economist Matthew Speakman, has prompted a reevaluation of living preferences and definitions of home.

While cities have experienced some exceptions, such as San Francisco, New York City, and Boston, property prices continue to rise in urban areas. The future trajectory of these prices depends on the long-term impact of remote work and the perceived value of city amenities when they become accessible once again.

The scarcity of available homes

The other significant factor contributing to skyrocketing home prices is the limited supply of homes. This issue predates the pandemic but has been exacerbated by it.

Even before Covid-19, there was a shortage of homes for sale. From 2010 to 2019, the US witnessed the lowest number of homes built since the 1960s. The pandemic has further worsened this situation, leading to a reduced number of homes being listed for sale.

Uncertainty and health concerns have discouraged some homeowners from putting their properties on the market, while others have withdrawn their listings altogether. Additionally, restrictions on home showings have made it more challenging for potential buyers to view properties.

According to Michael Neal, a senior research associate at the Urban Institute's Housing Finance Policy Center, the low supply of housing is the primary driver behind the rapid rise in prices. By the end of 2020, there were only 2.5 months of housing supply left at the current sales pace, indicating that the inventory of homes nationwide will be exhausted in a matter of months.

The shortage of homes is not solely a result of the pandemic but also stems from longstanding issues such as restrictive zoning regulations and local government practices. Onerous regulations restrict the construction of new housing, including townhouses, apartments, and condos, especially in areas zoned for single-family homes. Moreover, small groups of individuals often have the power to block new developments based on their concerns, ranging from preserving neighborhood character to unfounded fears of decreased property values.

The barriers to increasing housing supply are varied, and potential solutions range from market-based approaches to increased public housing initiatives. However, if the scarcity of housing continues, inequality will continue to rise.

Homeownership becoming an exclusive club

While homeowners have benefited from the surge in home values, an increasing number of Americans are being excluded from the housing market. Homeownership is becoming an exclusive club, with a prohibitively high cost preventing millions from entering.

Homeownership is widely regarded as the best way to accumulate wealth, with the median net worth of homeowners being 80 times that of renters, according to the US Census Bureau. However, the homeownership rate in the US has been declining, and this trend is set to continue. The authors of the Urban Institute's report project a decline in the homeownership rate from 64.7 percent to 62.1 percent over the next two decades, with the greatest losses affecting Black Americans and young Americans. The current homeownership gap between racial and ethnic groups is already significant, and without intervention, it will continue to widen.

The financial barriers to homeownership have become increasingly challenging, particularly for lower-income individuals. Credit standards have tightened since the Great Recession, making it harder for those with lower credit scores to secure mortgages. Inequitable credit assessment practices and a lack of financial support and guidance further disadvantage marginalized communities.

The impact of the Covid-19 pandemic has only exacerbated existing inequalities, with those at the lower end of the income scale facing job losses, housing and food insecurity, and greater financial instability. The consequences of rising housing prices and housing insecurity extend beyond individual households, affecting community health and educational outcomes.

To address these issues, various solutions have been proposed, including loosening credit standards, reforming zoning regulations, and expanding financial education programs. The housing crisis we face today is a result of our own actions, but it also presents an opportunity for us to implement meaningful change and create a more equitable housing market.

In conclusion, the housing market's boom amidst the Covid-19 recession can be attributed to a combination of factors, including increased demand due to low mortgage rates and changing preferences, as well as a limited supply of homes. However, this boom has also widened inequality, with homeownership becoming increasingly exclusive and leaving many Americans behind. Without concerted efforts to address systemic challenges, the housing market will continue to perpetuate inequality.