Having collapsed in April, housing starts in both the US and Canada have rebounded sharply with Canadian starts now at a year-high and US starts re-approaching the post-Global Financial Crisis highs reached around the turn of the year. As opposed to 2007-2008, when housing was at the epicenter of the crisis, it appears to be a stabilizing force in the broader economy today. Albeit being challenging in the short term, COVID-19 may also lastingly alter consumer preferences in favor of home ownership.
However, make no mistake: homeowners’ future mortgage servicing ability will hinge critically on how long the COVID-19 crisis persists. While the personal savings rate at nearly 20% speaks favorably of consumers’ financial cushion, there remain over 9 million out-of-work individuals who describe themselves as on temporary furloughs. Absent an effective medical solution to the pandemic, many of these (and perhaps plenty others) could find themselves outright unemployed. This is precisely the “relay race” nature of the recovery that we discuss in our mid-year market outlook: the persistent risk of relapse/failure despite having done quite well so far.
The housing sector is not immune to these risks, but there are several factors, both structural and COVID-related, that offer support. First and foremost, the sector has been “lean” for many years, having worked off the excesses leading to the GFC. Low credit risk borrowers have for years made up the bulk of new mortgage originations in the US, minimizing repayment risk (Figure 6).
These homeowners also have untapped home equity as outstanding home equity lines of credit during the second quarter stood at only a little over half of where they were back in 2009. In other words, homeowners have no incentive to default since they are not “underwater” on their mortgages. Another positive structural factor is that in the US residential segment, construction had only meaningfully picked up over the past couple of years. Even at the recent January peak, housing starts were only back to 2007 levels. Meanwhile, the US population had risen by over 27 million people.
Finally, the COVID crisis presents an interesting question in respect to its lasting impact on housing. While challenging in the shorter term via income losses and labor market concerns, the crisis may also lastingly alter consumer preferences in favor of home ownership. It is indeed notable that the building materials category in the July 2020 US retail sales data exhibited the third-highest YoY growth rate, following online sales and sporting goods. Apparently, more time spent at home is spurring a burst of home improvement activity!
The authors would like to thank Rebecca Chesworth for contributing to this article.