Show Transcript
The U.S. housing market has been one of the bright spots in the U.S. economy, despite the devastating impact of COVID-19. Anthony Okolie talks with Sri Thanabalasingam, Senior Economist, TD Bank, about the large wave of millennials entering the housing market after years on the sidelines.
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- Let's start with the big picture around the US housing market. Sri, US housing has been one of the bright spots in the US economy. But it wasn't completely immune to the COVID-19 crisis, correct?
- That's right, Tony. So in 2019, the US housing market was strengthening from where it was in 2018, both in terms of sales as well as housing starts. And we expected that strength to continue into 2020. But then the COVID-19 pandemic struck. And what we saw was, in terms of sales, both existing home sales and new home sales contract significantly in March and April. And existing home sales went to levels that we haven't seen since 2010.
And in terms of residential construction as well, that came to a standstill in many states, where these states were undergoing a lockdown. And so that exacerbated a housing supply issue in the US housing market, which has been a long running problem in the US economy.
- And so why hasn't housing supply kept up with demand?
- So as I mentioned, it is a long running issue. It's one that dates back to the 2008-2009 financial crisis. So the growth in the stock of homes has not kept up with the formation of households.
And there are many reasons for this. One, zoning regulations. So a lot of people in metropolitan areas want to live there, but because of zoning regulations, housing units cannot be built there. There are also high housing costs. Homebuilders have reported this as a problem, or to build homes. And there's also a lack of skilled workers to build homes as well. So all of these things are weighing on housing supply.
And so with these lockdowns, as I had mentioned, that exacerbated the housing supply issue in the US housing market.
- You also said in your report that housing is exhibiting a V-shaped recovery from the COVID-19 crisis. So what is driving this demand?
- Right. So the housing market has been exceeding expectations so far. And that demand, or primary source of that demand, appears to be millennials. Millennials have delayed forming households of their own compared to older generations, such as Gen X or Baby Boomers at similar ages. They were choosing to rent instead of buying homes for affordability reasons. But then we started to see that trend change in around 2019 and as well as 2020.
And the COVID-19 pandemic doesn't appear to have shifted that. Many millennials who are in good paying jobs and haven't lost employment are still choosing to jump into the housing market and see homeownership for the first time.
- What about housing costs? How has that impacted millennial decision making?
- Yes. So housing costs, I think, is playing an important role. As I had mentioned, affordability has been going up. And that started going up from around 2018 or so. One reason for that is millennial wages have been outpacing that of home prices. But another big reason are mortgage rates. Mortgage rates have been coming down, and now they're at historically low levels. I think last week they were sitting at 2.88%, something we haven't seen before.
So when you look at a monthly mortgage payment for a prospective home buyer, compared to 2018 they will be saving around $300 on an average price home. So that's significant. And that's attractive for homebuyers that want to enter the housing market.
- OK. So we know that there's some optimism on the horizon, certainly for the housing market. But what are some of the near-term risks to the US housing recovery?
- Yeah, so the US housing recovery is intimately tied to the path of the coronavirus as well as the labor market recovery. So if the coronavirus infection rates start surging again and then that spills over to a faltering labor market and people in higher income sectors start losing jobs, that could really weigh on the housing recovery, so maybe something that could happen in the fourth quarter.
But at the same time, if the virus is contained and the labor market recovery continues to keep going, then sales can be quite strong going forward. But it will be limited, as I had mentioned earlier, in terms of supply and the supply constraints.
In our baseline forecast, what we're expecting is after this initial boost in terms of sales in the third quarter, we're expecting it to gradually improve from there on in and to get to pre-pandemic levels by around mid-2021 or so.
- Sri, thank you very much for your time.
- Thanks, Anthony.
[MUSIC PLAYING]
- That's right, Tony. So in 2019, the US housing market was strengthening from where it was in 2018, both in terms of sales as well as housing starts. And we expected that strength to continue into 2020. But then the COVID-19 pandemic struck. And what we saw was, in terms of sales, both existing home sales and new home sales contract significantly in March and April. And existing home sales went to levels that we haven't seen since 2010.
And in terms of residential construction as well, that came to a standstill in many states, where these states were undergoing a lockdown. And so that exacerbated a housing supply issue in the US housing market, which has been a long running problem in the US economy.
- And so why hasn't housing supply kept up with demand?
- So as I mentioned, it is a long running issue. It's one that dates back to the 2008-2009 financial crisis. So the growth in the stock of homes has not kept up with the formation of households.
And there are many reasons for this. One, zoning regulations. So a lot of people in metropolitan areas want to live there, but because of zoning regulations, housing units cannot be built there. There are also high housing costs. Homebuilders have reported this as a problem, or to build homes. And there's also a lack of skilled workers to build homes as well. So all of these things are weighing on housing supply.
And so with these lockdowns, as I had mentioned, that exacerbated the housing supply issue in the US housing market.
- You also said in your report that housing is exhibiting a V-shaped recovery from the COVID-19 crisis. So what is driving this demand?
- Right. So the housing market has been exceeding expectations so far. And that demand, or primary source of that demand, appears to be millennials. Millennials have delayed forming households of their own compared to older generations, such as Gen X or Baby Boomers at similar ages. They were choosing to rent instead of buying homes for affordability reasons. But then we started to see that trend change in around 2019 and as well as 2020.
And the COVID-19 pandemic doesn't appear to have shifted that. Many millennials who are in good paying jobs and haven't lost employment are still choosing to jump into the housing market and see homeownership for the first time.
- What about housing costs? How has that impacted millennial decision making?
- Yes. So housing costs, I think, is playing an important role. As I had mentioned, affordability has been going up. And that started going up from around 2018 or so. One reason for that is millennial wages have been outpacing that of home prices. But another big reason are mortgage rates. Mortgage rates have been coming down, and now they're at historically low levels. I think last week they were sitting at 2.88%, something we haven't seen before.
So when you look at a monthly mortgage payment for a prospective home buyer, compared to 2018 they will be saving around $300 on an average price home. So that's significant. And that's attractive for homebuyers that want to enter the housing market.
- OK. So we know that there's some optimism on the horizon, certainly for the housing market. But what are some of the near-term risks to the US housing recovery?
- Yeah, so the US housing recovery is intimately tied to the path of the coronavirus as well as the labor market recovery. So if the coronavirus infection rates start surging again and then that spills over to a faltering labor market and people in higher income sectors start losing jobs, that could really weigh on the housing recovery, so maybe something that could happen in the fourth quarter.
But at the same time, if the virus is contained and the labor market recovery continues to keep going, then sales can be quite strong going forward. But it will be limited, as I had mentioned earlier, in terms of supply and the supply constraints.
In our baseline forecast, what we're expecting is after this initial boost in terms of sales in the third quarter, we're expecting it to gradually improve from there on in and to get to pre-pandemic levels by around mid-2021 or so.
- Sri, thank you very much for your time.
- Thanks, Anthony.
[MUSIC PLAYING]
