Tight Housing Market Could Prime Economic Recovery

"Although it’s too soon to say how far the economy will fall and when the slide will end, the housing industry may be poised to help lead the recovery, when it occurs, unlike it was after the Great Recession of the late 2000s," writes Daniel McCue.

Interest rates allow the housing market to lead the country out of, according to the article, as has been the case in past downturns.

Simply put, this is because recessions lead to a decline in interest rates that lowers borrowing costs for both homebuyers and builders, which makes homebuying more attractive and spurs homebuilding and the many related durable consumer goods industries that drive GDP growth. The strong connection has been documented by economists such as Edward Leamer, whose 2007 working paper goes so far as to carry the title, “Housing Is the Business Cycle.”

After detailing the methodology of studies that quantify the connection between the housing market and economic recovery, McCue also documents the differences between the current economic downturn of the coronavirus and the circumstances of the Great Recession. According to McCue, "one key difference between the Great Recession and today is the lack of a substantial overhang of distressed and foreclosed properties, which after the last recession needed to be absorbed before housing construction could be a driver of recovery."

McCue also notes that the suspension of housing construction projects, as mandated in many parts of the country during the worst of the coronavirus outbreak, will contribute to housing shortages in an already tight housing market—in another fundamental difference from the previous recession.

While McCue focuses on the redemptive potential of a tight housing market, others, like a team of researchers at the Urban Institute, have expressed concern that the tight housing market will only exacerbate the pre-existing inequalities in both the housing market and the larger economy.