Economic data will be dismal through the second quarter, but it is possible to look beyond the recession of 2020 and its viral roots and explore possible long-term impacts on housing and the economy.
Housing entered the recession significantly underbuilt. Estimates vary, but based on demographic need and NAHB modeling, the U.S. has a housing deficit of about 1 million residences. Freddie Mac estimates the shortage may total 2.5 million homes. While the causes lie on the supply-side of the market, the demand-side consequences include reduced household formation, declining vacancy rates, increased development of accessory dwelling units, and a rise in the share of young adults living with their parents.
Given this backdrop, the surge in unemployment during the first half of the year, and implications concerning the virus itself, it is reasonable to expect certain long-term changes for housing demand. Here’s an initial list of those changes:
Housing demand will increase in medium- and low-density neighborhoods. An unavoidable lesson of the public health crisis associated with COVID-19 is that high-density environments, like central cities, faced greater challenges. High-density lifestyles, championed by some urban planners over the past decade as a rival to suburban living, proved to be vulnerable to a virus due to crowded living conditions, dependency on mass transit, and insufficient health and public sector infrastructure. While I am not forecasting a rush to rural areas and the exurbs, this crisis will increase housing demand for inner suburbs (medium-density environments) and outer suburbs. Additional telecommuting flexibility will enable households to “drive further till you qualify” for mortgages.
Home size will grow again. Over the past three years, median new-home size has declined as the market sluggishly added additional entry-level inventory while the high-end remained solid. However, for many the frustrating limits of their current home space have become clear during this viral crisis. Whether expanding an existing home or purchasing new, home size will increase to meet the rising needs of office space, gyms, and living space.
Single-family rental housing will see a window of opportunity. While housing dedicated to short-term rentals will see higher vacancy rates due to a reduction in demand for travel, there will be market opportunities for long-term rentals of single-family homes. Demographic tailwinds combined with labor market headwinds (like weak wage growth and elevated unemployment) mean higher rental demand for single-family structures.
Conversion of retail spaces into residential property will accelerate. As online retail and delivery increases, the need for retail physical space will decline. That same effect will occur for office space as telecommuting options remain flexible. This will present redevelopment opportunities for home builders to build low-rise multifamily, townhouses, and single-family housing in formerly occupied commercial real estate footprints.
Focus on skilled labor availability will remain. Housing affordability will continue to be a challenge as the economy recovers. As was true before the recession, increasing residential construction labor productivity will be required to “build more with less” and help bend the cost curve to offset the burden of housing expenses.
While not exclusive, this list highlights the economic evolutions the building sector will face as the recovery begins. We’re not forecasting a V-shaped recovery, but the rebound will be led by sectors like home building. Given the importance of home for all Americans so far during this pandemic, housing will remain in the forefront of consumer decisions.
