For evidence of the fissures that have opened up in the US economy since the outbreak of the Covid-19 pandemic, take a look at the housing market.
The US is on track in 2020 to suffer the worst economic contraction since at least the financial crisis, with the US Federal Reserve forecasting a 2.4 per cent slump for the year. The shock has left millions of Americans without jobs. Yet the housing market is doing well.
Take, for example, the bullish comments from the chief executive of Toll Brothers, the Pennsylvania-based upmarket homebuilder that has long been seen as an industry bellwether.
The US is experiencing “the strongest housing market” that Douglas Yearley has seen in his three decades at Toll Brothers. In results this month, he said the company had its highest year-end order book in 15 years and was able to increase prices in nearly all of its communities.
Similarly, Stuart Miller, executive chairman of home builder Lennar, said this week the housing market “has proven to be very strong and we expect it to continue to be a significant driver in the recovery of the overall economy over the next several years”.
Investors have lapped all this up, sending the S&P 500 homebuilding index up about 130 per cent since its 2020 lows struck in March. By comparison, the blue-chip S&P 500 has advanced 65 per cent since its March lows.
Amid the pandemic, Mr Yearley said there had been a “renewed appreciation for the home as a sanctuary”. He added the work-from-home phenomenon was also enabling more buyers to live where they want rather than where their jobs previously required.
For many, the home this year suddenly became more than a place to reside. It became an office, a school for the kids, a gym, a movie theatre. So people sought out roomier dwellings as they spent more time indoors. Many also opted to leave crowded urban centres for the suburbs.
Demographic shifts also aided the sales boom, says Nancy Vanden Houten, lead economist at Oxford Economics. She says “the millennial generation is moving into what are typically homebuying years”.
Moreover, the pandemic has disproportionately hit lower-income households, which are more likely to be renters. Many higher income people who have managed to hold on to their jobs have seen their wealth grow, as stock markets rebounded and their home equity strengthened.
And there is a more prosaic reason for the housing market strength. The “jet fuel to the whole equation is the interest rate story”, says Nora Creedon, global head of Reits and infrastructure at Goldman Sachs Asset Management.
US interest rates are at rock-bottom levels. The average interest rate on a 30-year fixed-rate mortgage stands at 2.67 per cent. This has helped boost buying power and drummed up demand for housing at a time when inventory is tight. The stock of unsold, previously-owned homes sits at an all-time low of 2.5 months of supply at the current sales pace, while that of newly constructed homes stands at about 3.3 months.
That has driven home values up 7 per cent annually in September — the largest gain in six years.
There are some warning signals, however. A Covid-19 relief programme that allows homeowners in financial difficulties to skip monthly payments on federally guaranteed mortgages for up to a year and make them up later is due to expire on December 31. Some 5.48 per cent of these loans are in such a programme.
Still, the housing sector overall is expected to be relatively sheltered. Americans with mortgages have amassed a collective $1tn in home equity since the third quarter of last year, or an average $17,000 per homeowner — the largest such gain since the start of 2014, according to Corelogic.
That allows struggling households to sell their homes for a profit rather than go into foreclosure. After years of underbuilding, the industry faces a shortfall of nearly 6m single-family homes based on the annual average rate of production over half a century and US household growth, according to Mr Yearley.
Affordability is still an issue, especially for first-time buyers who “do not have home equity to bring to the closing table”, says Odeta Kushi, deputy chief economist at First American.
But the broader housing market strength is having knock-on effects on the economy, boosting home improvement work and sales of furniture and cars. Home price gains have made people “feel wealthier” and as a result “they're likely to go out and spend money”, says Randy Frederick, vice-president of trading and derivatives at Charles Schwab.