If you watch the news you know that ten million workers lost their jobs in the past two weeks. When the unemployment rate is announced on May 8th it is expected to be in the double digits due to the fact that the health crisis caused by COVID-19 has brought the US economy to an abrupt halt causing many to feel the impact of the financial crisis personally. James Bullard, President of the Federal Reserve Bank of St. Louis, explained that the government is trying to find ways to assist those who have lost their jobs and 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 this is promising we are still uncertain as to when those who have recently lost their jobs will be able to return to work.
Another concern is how badly will the U.S. economy be damaged if people can’t buy homes?
A new/second concern regarding the high unemployment numbers is will this cause the residential real estate market to crash which would but an even greater strain on the economy leading to even more job losses. The housing industry is a major piece of the overall economy in the United States.
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 makes sense to believe that there would be a direct correlation with regard to 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.
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. Take a look at numbers 1 through 4:
- The unemployment rate was rising between 1992-1993, yet home sales increased.
- The unemployment rate was rising between 2001-2003, and home sales increased.
- The unemployment rate was rising between 2007-2010, and home sales significantly decreased.
- The unemployment rate was falling continuously between 2015-2019, and home sales remained relatively flat.
The impact of the unemployment rate on home sales doesn’t seem to be as strong as we may have thought.
Isn’t this time different?
Yes. There is no doubt the United States has not seen job losses happen this quickly in almost one hundred years. So, 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 only thing this article addresses), it does not compare. Below you will find the unemployment rates during the Great Depression, the Great Recession, and the projected rates moving forward:
These are facts as we know them. It is clear that while the housing market started off strong it is going to 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.