The Sad Reason the Housing Market Is Booming During a Recession

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During economic recessions, house prices tend to go down. The reason is quite simple; personal income is one of the most significant factors driving home prices. The more money people make, the higher price they can afford to pay for a house.

During a recession, jobs and income levels decline, which means people have less money and can’t afford to pay as much money for a house.

In 2020 we are experiencing the most severe recession since the great depression (yes, it’s worse than the financial crisis,) but housing prices are at an all-time high.

In this article, I’ll explain how that is possible and why it is bad news.

The 2020 recession is more intense than the financial crisis

  • Q1: -3%
  • Q2: -37.8%
  • Q3: +30%

Those are some pretty extreme numbers, and when you add them all up, we find that U.S real GDP is currently down 3.5% compared to where it was at the end of 2019.

This wild ride is illustrated in the following chart.

Source: Federal Reserve Bank of St. Louis

Putting this recession into proper context

Consider that the peak to trough decline in real U.S GDP during the financial crisis was 3.97%.

So, we can summarize the severity of this recession as follows.

Even after a 30% annualized Q2 growth in GDP, and trillions of dollars in monetary and fiscal stimulus, the U.S economy is roughly in the same position it was during the darkest days of the financial crisis.

The 2008–2009 recession was the most severe since the great depression, and that is roughly where we are at today.

Yet, Housing prices are at an all-time high

That is represented in the following graph, where the official start of the recession is measured in the yellow shaded area.

Source: Federal Reserve Bank of St. Louis

By the same measure, home prices were down nearly 22% from January 2007 to February 2010.

Source: Federal Reserve Bank of St. Louis

It’s all about income

Remember, at the beginning of this article, I mentioned that personal income is one of the most important factors that drive housing prices.

During the financial crisis, governments responded with monetary stimulus but not nearly enough fiscal stimulus.

During 2020, governments around the world have provided unprecedented levels of fiscal stimulus. Put simply, much of this fiscal stimulus has replaced the income of people who lost their job during the recession.

So, even though this recession is even more severe than the financial crisis, personal incomes have not been impacted in the same way due to the fiscal stimulus.

Which is a good thing.

However, the fiscal stimulus does not tell the whole story as to why house prices are rising. What really impacts the price of housing is the income of people who are in the market to buy a house.

Which is where the sad part of the story comes into play.

Low-income earners have been hit hardest in 2020

Low-income workers have been hit hardest, but that would have little impact on the demand for houses because low-income earners can’t afford to buy houses; They rent.

It is the middle to high-income earners who buy houses, and their incomes were less impacted. Couple that with the fiscal stimulus and rock bottom interest rates, those higher income earners that were lucky enough to keep their job have been bidding up the price of houses.

Wealth inequality is on the rise

  • Housing prices, the largest component of personal wealth, is at an all-time high.
  • The stock market is also at an all-time high.
  • Many high-income earners have been lucky enough to work from home and keep their jobs.
  • This allows them to invest more in housing and the stock market.
  • The lowest income earners have been hit the hardest.
  • Low-income earners are also much less likely to own their home or have any money invested in the stock market. This means they have not benefited from the rebound in these asset prices.

All of this adds up to an increase in the wealth gap.

Future fiscal stimulus needs to be aimed at low-income earners

This should provide a clear roadmap to governments; the easiest way to spur economic growth is for income supports to those with the lowest income.

Not only is it the right thing to do (helping those who need it the most.) It’s also the fastest way to spur economic growth.

Any fiscal stimulus received by people like me who have been lucky enough to be (financially) unaffected by this recession will only serve to drive up asset prices even further.

If the government sends me a check, I can tell you 100% of that is getting invested in the stock market. That is because I don’t need the money right now.

If the government sends a check to a low-income earner or someone who lost their job, that money will be spent on groceries and other living expenses.

That is what spurs economic growth and can help prevent inequality from growing at the pace it has been.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. All views and opinions are solely of the author.