Will Home Sales Crash with Surging Unemployment?

Twenty six million Americans, lost their jobs over the last five weeks, yes thats 26,000,000. Even the bulletproof DMV economy inside the beltway is experiencing record job loss. May 8th is the next official announcement for national unemployment numbers and is expected to be unprecedented. This has re-ignited the question about the real estate market since 2008 is not that far in the rear view mirror. Will home sales crash with surging unemployment?

The health crisis has brought the national economy to a screeching halt leaving many facing a personal financial crisis. The President of the Federal Reserve Bank of St. Louis, James Bullard, explained that the government is trying to assist companies and individuals experiencing the brunt of the financial crisis. In a recent interview he said:

“This is a planned, organized partial shutdown of the U.S. economy in the second quarter. The overall goal is to keep everyone, households and businesses, whole.”

That’s great, but when will people be able to return to work?

How badly will the U.S. economy be damaged if people can’t buy homes?

Now that some parts of the country are considering re-opening, the concern is whether the high number of unemployed Americans will cause the residential real estate market to crash. The housing industry is a major piece of the overall economy in this country and will cause more strain.

Chris Herbert, Managing Director of the Joint Center for Housing Studies of Harvard University, in a post titled Responding to the Covid-19 Pandemic, addressed the toll this crisis will have on our nation, explaining:

“Housing is a foundational element of every person’s well-being. And with nearly a fifth of US gross domestic product rooted in housing-related expenditures, it is also critical to the well-being of our broader economy.”

How has the unemployment rate affected home sales in the past?

It’s logical to think there would be a direct correlation between unemployment rate and home sales. As the unemployment rate went goes up, home sales would go down.

However, research shows the last thirty years doesn’t show this direct relationship, as noted in the graph below. The blue and grey bars represent home sales, while the yellow line is the unemployment rate. Take a look at numbers 1 through 4:

1. Unemployment was rising between 1992-1993, but home sales increased.

2. Unemployment was rising between 2001-2003, but home sales increased.

3. Unemployment rate was rising between 2007-2010, and home sales significantly decreased.

4. Unemployment rate was falling continuously between 2015-2019, but home sales remained relatively flat.

The impact of the unemployment rate on home sales doesn’t seem to be as strong as expected.

Isn’t this time different?

Yes, Yes, Yes…… There is no doubt the country hasn’t seen job losses like this since the great depression. Goldman Sachs projects the unemployment rate to be 15% in the third quarter of 2020, flattening to single digits by the fourth quarter 2020, and then just over 6% percent by the fourth quarter of 2021. Not ideal for the housing industry, but manageable.

How does this compare to the other financial crises?

Some believe this is going to be reminiscent of The Great Depression if the lockdown goes too much longer. From the standpoint of unemployment rates alone (the only thing this article addresses), it does not compare. Here are the unemployment rates during the Great Depression, the Great Recession, and the projected rates moving forward:

Bottom Line

These are the cold hard facts and it’s obvious the housing market will have challenges this year. However, when it comes to real estate, this is nothing like the financial crisis from 2007-2009. As far as Northern VA real estate market, homes are selling and the market is still moving forward in a positive direction.