Covid-19 caused a recession. So why did the housing market boom? (2023)

Covid-19 plunged the United States into a recession, leaving millions of Americans out of work and hungry. In the middle of this crisis, the housing market boomed.

Between September 2019 and September 2020, homeowners accumulated a collective $1 trillion in additional home equity. The exploding demand of the past year, in conjunction with a historically low supply of housing, has led buyers to desperately bid up the prices of available properties, sending home prices soaring.

The boom has been welcome news for homeowners (about 65 percent of American households are owner-occupied), but it’s troubling for the growing number of Americans who are being shut out of the housing market altogether.

In a new Urban Institute report, researchers found that if the country continues down the same road, over the next two decades the US homeownership rate is set to decline to 62.1 percent. The losses will be concentrated among younger people and Black Americans. When you break down the findings by age cohort, things look grim: Younger millennials will have a homeownership rate of 64 percent as opposed to the 72 percent of boomers who owned homes at their age. Further, the racial homeownership gap between Black and white Americans is set to increase among 55- to 64-year-olds from 28.9 percentage points to 33.3 percentage points.

These trends are part of a long-running failure to build enough homes for the people who need them, post-Great Recession credit-tightening, which has reduced the pool of potential homebuyers, and the effects of Covid-19 which have exacerbated all of these trends.

So by all accounts the housing market is booming, but inequality is, too.

How Covid-19 affected the demand for housing

Across the country, housing prices are rising — quickly.

The S&P CoreLogic Case-Shiller National Home Price NSA Index, which tracks price changes of single-family homes, indicates that in November 2020, housing prices had risen 9.5 percent from the previous November. At the end of 2019, the average home was worth around $245,000. It’s now worth more than $266,000, according to Zillow.

This is a huge increase, and there are a few factors behind it.

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The price of a house is tied to the supply and demand for housing: If there are fewer houses available, prospective buyers bid up the price in order to get one; if fewer people are looking for a home, the price will drop because buyers have fewer competitors. Covid-19 has affected both supply and demand.

Daryl Fairweather, Redfin’s chief economist, told me that she believes the increase in home values is mostly a demand story: People are scrambling to take advantage of plummeting mortgage rates that make the cost of buying a home much cheaper.

Due to falling mortgage rates, the cost of borrowing money to buy a house is dropping. Mortgage rates have been falling steadily for a while, but they fell dramatically in 2020 — reaching a record low of 2.65 percent in January 2021.

Covid-19 caused a recession. So why did the housing market boom? (1) Tim Ryan Williams/Vox

This is a big deal. Let’s say you bought a $300,000 house a year ago, before Covid-19 hit the US. If you locked in a 3.73 percent mortgage rate, you’d end up paying $498,940 over 30 years. If you bought it in 2020 at the low of 2.67 percent, you’d pay $436,337, a savings of more than $60,000.

So this is inducing a lot of the demand right as America’s biggest generation ever, millennials, have aged into their prime homebuying years. Data suggests that people who can take advantage of the rates are doing so. The Mortgage Bankers Association data shows that “mortgage applications for new home purchases increased 33 percent compared to a year ago” in August and 27.1 percent in November compared to a year ago. In September, the typical home sold in only 16 days, down from 28 days a year earlier. And roughly two-thirds of people who bought a home in 2020 made an offer on a house that they had never seen in person.

People who were on the edge about buying a home have jumped into the market; some of these people are first-time homebuyers or buying second homes, both of whom add considerable pressure to the market since they’re not putting up a home for sale as they take one off the market. Moreover, many people are choosing to just refinance their mortgage at the new, lower rate rather than deal with trying to find a new home in such a competitive environment.

Covid-19 caused a recession. So why did the housing market boom? (2) Scott Strazzante/The San Francisco Chronicle via Getty Images

A June National Bureau of Economic Research paper by researchers from the University of Chicago estimated that 37 percent of jobs, a share concentrated among high-paying jobs, can be performed entirely remotely. During the pandemic, many of them have been remote for the first time.

Long-running preferences for more space intensified as Covid-19 forced people to spend more time at home. It also reduced the value of urban amenities when restaurants, indoor gatherings with friends who live nearby, cultural exhibits, and more are unavailable. These simultaneous pressures have seen people moving to suburban environments, opting for yards and extra space to accommodate simultaneous work and school.

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“We’re calling this the Great Reshuffling,” Zillow economist Matthew Speakman told Vox. “It’s changed the way people think about where they need to live, and it’s changed their definition of home.”

Still, reports of the death of cities have been greatly exaggerated. Property prices in cities are still rising with some exceptions like San Francisco, New York City, and Boston. Whether they continue to rise depends on how much remote work sticks around, and how much people actually value the amenities living in a city provides, when they can actually access them.

There aren’t enough homes

The other factor driving housing values is supply: how many homes there are available to buy — both newly built and those being sold by their existing owners.

It’s not a new problem — but it’s yet another issue Covid-19 has made worse.

“Even going into the pandemic, there was a shortage of homes for sale,” Fairweather told Vox. “From 2010-2019 [we] had the lowest amount of homes built than in any decade since the 1960s.”

Covid-19 made this worse in a few ways. First, during any financial downturn, some people are reluctant to make big changes due to the uncertainty in their lives. That means people who might have listed their homes chose not to this year; others took their homes off the market as Covid-19 spread across the country. Covid-19 also made people nervous to show their homes: You likely don’t want strangers traipsing through your living room as a little-understood but highly contagious disease runs rampant through your community.

Michael Neal, senior research associate at the Urban Institute’s Housing Finance Policy Center (HFPC), believes that low supply is “probably the biggest contributor” to the rapid rise in prices.

By the end of 2020, there were only 2.5 months of supply left of housing, according to the Urban Institute. Simply put, “at the current sales pace, the inventory of homes nationwide will be exhausted” in just a few months, limiting the supply even more.

Even with technological improvements to the home-selling process, like 3D home tours, there are still many fewer homes on the market this year than last.

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Covid-19 caused a recession. So why did the housing market boom? (3) David Paul Morris/Bloomberg via Getty Images
Covid-19 caused a recession. So why did the housing market boom? (4) Luke Sharrett/Bloomberg via Getty Images

Long-running supply issues are in large part due to onerous regulations at the local level that artificially restrict the amount of housing that can be built, from single-family zoning that makes it illegal to build townhouses or apartments or condos on any land zoned for a single unit to parking minimums that require developers to use valuable land for parking spaces even where it’s unnecessary.

Additionally, the structure of local government allows small groups of (typically unrepresentative) people to block new development for a variety of concerns, from “neighborhood character” to the belief that low-income housing will drag down property values and even worries about the environmental impact of new development (although sprawl should be the bigger environmental concern).

In 2017, Yale Law professor David Schleicher wrote a paper called “Stuck! The Law and Economics of Residential Stagnation.” In it, he documents local restrictions on housing development, arguing they have become so overbearing that the increase in the cost of housing and rents has made moving to a better place impossible for millions of Americans. Local zoning regulations are strangling opportunity.

Experts and activists across the political spectrum disagree about how best to solve these problems — from a market-based vision of simply allowing as much market-rate housing as possible to left-leaning dreams of a public housing utopia.

But if we don’t figure out a way to build more housing where people need it, inequality will continue to skyrocket.

Homeownership is becoming an increasingly exclusive club

The soaring demand and constrained supply have been great news for homeowners who have seen their home values increase. And for those who have been able to take advantage of historically low mortgage rates, navigating the market may have been stressful, but they came out of it with a great deal.

But a growing share of Americans is shut out of the housing market together. Homeownership is becoming something akin to an exclusive club that forces patrons to pay an enormous cover charge to enter, while tens of millions are left out in the cold.

“Homeownership is the single best way to build wealth,” said Laurie Goodman, vice president at the Urban Institute and co-author of the new report on the future of homeownership. According to the US Census Bureau, the median net worth for a homeowner is 80 times that of a renter.

But the share of Americans who own homes has been falling. If it continues on the same path, over the next two decades, the US homeownership rate will decline from 64.7 percent to 62.1 percent, Goodman and her co-author found in their report, and those losses will be concentrated among Black Americans and young Americans. It will exacerbate current inequalities where “72 percent of non-Hispanic white households owned homes in 2018, compared with 57 percent of Asian households, 48 percent of Hispanic households, and 42 percent of Black households. Notably, the current homeownership rate for Black households is even lower than it was when fair housing laws were passed in 1968,” the researchers write.

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Homeownership can confer great benefits — primarily wealth-building but also the stability in knowing your shelter isn’t at the whim of a landlord. Homeowners’ median wealth is nearly 90 times that of renters, in large part due to home equity. It can also allow you to borrow against the value of your house in tough times or to help your kids attend college or start a family.

Covid-19 caused a recession. So why did the housing market boom? (5) Max Herman/NurPhoto via Getty Images

Since the Great Recession, it’s become harder for lower-income people to purchase a home. The median FICO score for purchasing a home is now 45 points higher than it was before the housing crash. The 10th percentile, deemed the “lower bound of creditworthiness to qualify for a mortgage” is now 657; before the recession, it was below 600.

“Credit-worthiness” is also defined in ways that disproportionately harm low-income people: Right now, most credit bureaus count payments on existing debt, but not on-time rental and utility payments. And income is frequently not assessed properly for people without traditional employment, such as gig workers. Income and wealth inequality, which will be exacerbated by the past year where those at the higher end of the income ladder recovered quickly from the financial shock (and by some measures are even doing better) and those at the bottom end are facing permanent job losses, long-term housing insecurity, and food insecurity.

“It’s the two worlds right now,” Alanna McCargo, vice president of the Urban Institute’s Housing Finance Policy Center, said during a panel discussion on the future of housing affordability. “There’s a whole lot of people that this pandemic is annoying or just a nuisance and then just a huge part of the population in this whole other place of distress and despair.”

The financial impact of Covid-19 has been concentrated among the least well-off. And even if lower- and middle-income people and people of color have remained financially stable over the past year, there are other structural barriers to homeownership, such as the fact that Black Americans and those who come from low-income backgrounds are less likely to get help with down payments or advice on navigating a complex process.

Some homeowners and recent buyers who have seen values soar during the pandemic might feel safe now. But in the end, everyone is hurt by skyrocketing housing prices and increasing levels of housing insecurity. As rents rise for people down the income ladder, inequality can have destabilizing effects for communities, as health and educational outcomes are closely tied to stable housing.

The last year was the clearest example yet of what can happen when we allow stable housing options to become scarce. The spread of Covid-19 among housing-insecure and homeless populations didn’t stay there — it affected entire communities through increased transmission rates and strained hospital resources.

There are several options we can explore to increase the homeownership rate and reduce racial and generational inequality, from loosening credit standards to enacting zoning reform and expanding financial education. It’s a crisis in many ways of our own making. So it’s up to us to unmake it.

(Video) The Effects of COVID-19 on Real Estate Markets

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FAQs

Why are house prices rising so fast? ›

Limited supply and strong demand is keeping house prices high – there are too few properties for sale compared to the number of buyers. However, growth in prices has finally started to slow down. Even since the onset of the pandemic, the market defied the odds: not just surviving but positively thriving.

What caused US housing crash? ›

What caused the housing crash? Many factors led to the 2008 housing crash, Conklin said. Exotic loans that required little documentation or featured variable interest rates helped people buy homes they didn't have the income to afford. Homeowners who had subprime loans defaulted on their loans.

What will happen to house prices during a recession? ›

During a recession, it is possible to see an increase in the rates of foreclosure, flat or declining property values and houses staying on the market for longer before they are sold.

Why is the demand for housing increasing? ›

Affordability.

Rising incomes mean that people are able to afford to spend more on housing. During periods of economic growth, demand for houses tends to rise.

Will house prices fall in 2022? ›

It said house prices will have risen 6 per cent by the end of 2022 but that they will fall 5 per cent in 2023 and a further 5 per cent in 2024 as a result of the sudden spike in mortgage rates caused by the government's fiscal plans.

Are house prices coming down in 2022? ›

The current economic conditions mean that it is growing increasingly likely house prices will start to fall in 2022.

What caused 2008 housing crisis? ›

What Caused the 2008 Financial Crisis? The 2008 financial crisis began with cheap credit and lax lending standards that fueled a housing bubble. When the bubble burst, the banks were left holding trillions of dollars of worthless investments in subprime mortgages.

Who is to blame for the Great Recession of 2008? ›

The Biggest Culprit: The Lenders

Most of the blame is on the mortgage originators or the lenders. That's because they were responsible for creating these problems. After all, the lenders were the ones who advanced loans to people with poor credit and a high risk of default. 7 Here's why that happened.

How long did the 2008 housing market crash last? ›

It took 3.5 years for the recovery to begin after the recession began. A lot of buyers who bought in 2008, 2009 or 2010 saw their home prices decrease before the recovery started in 2011. Condos deprecated by only 12%, while single-family homes depreciated by 19% after the recession.

Will inflation cause a housing crash? ›

At the end of the day, buyers are going to feel inflation's impact, but it's unlikely to cause a crash or any drastic shift in the market. If you're hoping to buy a home and want to gauge how inflation and higher rates will influence your goals, get in touch with a mortgage professional in your area.

What are the major forces influencing housing demand? ›

The housing market is affected by economic status, interest rates, real income, and population density changes.

Does inflation increase house prices? ›

How Does Inflation Affect Property Value? In terms of the housing market, inflation causes house prices to increase over and above where the average might sit due to simple supply and demand. This often leads to many potential buyers being priced out of buying a property.

Will the house prices drop in 2022 UK? ›

It previously forecast that house prices would fall by as much as 30.2pc between 2020 and 2022, with even its base case model predicting a 0.7pc decrease.

Is it a good time to buy a house UK 2022? ›

Rising inflation and costs do mean house prices could fall, though it is “unlikely that house prices will crash”. Property site Rightmove says that house prices could fall slightly towards the end of 2022, although it predicts that prices could still be 5% higher than they were at the end of 2021.

Is now a good time to buy a house Martin Lewis 2022? ›

Martin Lewis has issued a fresh warning to home buyers as rates are expected to rise 6% in 2023. The Money Saving Expert founder has advised that first time buyers should not be buying a house right now unless they are prepared and plan to live in the home for the long term future.

Will house prices Drop in Ireland in 2022? ›

The average listed price nationwide in the third quarter of 2022 was €311,514 - up 0.1% on the average for the second quarter of the year. Mr Lucey said he expects to see a drop in prices over the coming months, he told RTÉ's Brendan O'Connor show yesterday.

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