Pandemic housing shifts to spur recovery in 2021

The impact of the housing market on the 2008 financial crisis couldn’t have been more different than what we’ve seen during this year’s recession. While housing acted as a strong headwind slowing the economic recovery 12 years ago, not it’s looking like a tailwind that will help lift the economy as we move past the pandemic in 2021.
The damage wrought to the sector after 2008 was multipronged and long-lasting. The glut of foreclosures and inventory overhang meant that very little new construction was needed for years. There was consequently minimal growth in construction employment—a key driver of the business cycle — coming out of 2008 until the latter part of 2012. That was one reason why the early years of the recovery felt like we were still stuck in a recession.
But an even bigger impediment to the economy was the negative wealth effect for homeowners. For the middle class in particular, home equity is their greatest source of wealth, which was wrecked by the decline in home prices. Aggregate home equity in the US fell by more than 40%, or $6.2 trillion, between the fourth quarter of 2005 and the first quarter of 2012. The decline hurt consumer confidence, curtailed spending and led to years of household deleveraging.
The foreclosure crisis pushed homeowners into renting at the same time large numbers of young Millennial workers were also entering the rental market, squeezing renters at a time of high unemployment and low wage growth. This was particularly problematic given that there was essentially no growth in apartment construction between the mid-1990’s and the mid-2000’s peak of the housing market. Developers at the time were more focused on serving the booming suburban and exurban single-family home market.
The net effect: Subdued construction job growth, household deleveraging, foreclosures, a negative wealth effect for middle class homeowners, and rent growth exceeding wage growth turned the early years of the post-2008 economic recovery into a grind.
A decade later, we’ve seen shifts in the housing market this year that could boost economic activity in 2021. Rising buyer demand combined with a shortage of homes for sale have led to accelerating price growth since the first quarter. At this point, a 10% year-over-year increase in home prices looks plausible for 2020.
—Bloomberg