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Look for housing to rescue the economy, Nothaft says

Pent-up demand and shortage of inventory will stimulate homebuilding, he says


The housing industry got a bad reputation the last time the American economy tanked.

Not the houses themselves – most of them are still in place, perhaps painted a time or two since 2008, now being used to home-school children and provide families with shelter from the worst pandemic in more than a century.

It was, specifically, a risky sub-sector of home financing – subprime loans – that got packaged into bonds, stamped with Triple-A ratings and sold at huge profits to investors including pension funds and Wall Street banks. When banks started failing, it pushed the nation’s financial system to the brink.

Now, the housing industry has a chance to redeem its reputation by rescuing the American economy, said Frank Nothaft, chief economist of CoreLogic. Nothaft was the chief economist of Freddie Mac for 28 years, including the time of the housing crash and three years into the recovery.

It’s a familiar role for the nation’s largest asset class: In every recession before the 2008 financial crisis, housing supported GDP as other industries faltered.

“I think housing will be the sector that pulls the economy along and pulls it out of recession,” Nothaft said. “That’s what we’ve seen in past recessions, with the exception of the Great Recession.”

It happened in 2001, the last time a recession was caused by an outside force rather than the rotting-from-within of the financial system that happened 12 years ago.

Alan Greenspan, the chairman of the Federal Reserve when terrorists flew planes into the World Trade Center, pulled the levers of monetary policy in an effort to push down long-term interest rates.

He ended up creating a five-year real estate boom as people spooked by the gyrations in the stock market decided they wanted to put their money in a more tangible asset: A home.

The real estate industry was firing on all cylinders, and that helped to fuel the U.S. economy.

It’s not just the ancillary spending that goes along with a home purchase, such as curtains, couches and stoves, that creates economic growth. Though, that’s an important factor in an economy that’s driven by consumer spending: In a typical quarter, about 70% of GDP growth is caused by Americans spending.

It’s also the direct impact of homebuilding, which creates jobs and fuels demand for lumber, drywall and other building material. In fact, homebuilding is measured as a direct component of GDP, with the fancy title “private residential fixed investment.”

In some years, like 2004 and 2005, it accounts for almost half a percentage point of the nation’s GDP. After the housing crash knocked the industry out cold, it hasn’t managed to come anywhere near that.

Later this year, we’ll see homebuilders begin to flex their muscles as they attempt to meet the historic shortage of homes that plagued the market in the year before COVID-19 hit America, Nothaft said.

The reason housing will thrive is: Interest rates fall when economic news is bad, especially when the Fed steps in to help, and, that makes the rent vs. buy comparison more favorable for owning a home, Nothaft said. The average U.S. rate for a 30-year mortgage hit an all-time low last week after the Fed poured money into a bond-buying program.

When the going gets tough, a family might be able to do without the latest gadget from Best Buy, but still needs a place to lay their heads at night.

Unlike the Great Recession, banks and other mortgage lenders aren’t shuttering. In fact, they’re hiring to ramp up for a wave of refinancings as homeowners scramble to get the lowest rates ever offered.

But, of course, not everyone can buy a home or get a refi right now. The unemployment rate for April was 14.7%, an all-time high in a series that goes back more than 70 years.

That still leaves 85.3% of Americans with a job, and of those folks, many will see this as a good chance to make a home purchase, Nothaft said.

“The unemployment rate is a bleak and terrible number, but it still means more than 80% are employed, and they’re looking at a record low in mortgage rates that improves affordability and lowers monthly payments,” Nothaft.

Some will be Millennials squeezed out of the pre-pandemic market because of the competition that resulted from a historic shortage of properties on the market, he said. With some of their prior competition knocked out by job losses, this could be their moment, Nothaft said.

“Millennials who have their financial house in order and are ready to buy are going to be well-positioned to jump in and buy a home as soon as we see more supply coming onto the market,” Nothaft said.

And, that’s another difference compared to the Great Recession. Then, there was a glut of homes on the market because of years of over-building as speculators snapped up properties as fast as homebuilder put them up.

Now, we’re at the tail end of a decade of underbuilding.

One gauge of that is the homeowner vacancy rate from the Census Department that measures the share of U.S. homes that are vacant and for sale. The rate dropped to 1.1% in the first quarter, the lowest in four decades. During the Great Recession, it spiked to a record high of 2.9%.

“Homebuilders are well positioned to ramp up and start building, given that we have an undersupply, with a very low vacancy rate,” Nothaft said.

“They’ve seen a big drop in traffic so they’ve scaled back building for now, but as jurisdictions start relaxing restraints, that’s when I see homebuilders having a significant rebound – it could be June or July,” he said.

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