The “K-Shaped” Recovery

As the end of the third quarter draws near, and we find ourselves now more than six months into a pandemic, the contours of the economic recovery are becoming more clear. The structure of this recovery can best be understood in the dichotomy of the next two paragraphs.

Over the last few months, roughly 10.5 million jobs have been added back to our economy. The unemployment rate, which had moved to levels not seen since the Great Depression, has fallen to 8.4%. The stock market continues to show its bullish resilience, showcased by the S&P closing at record highs in mid-August and plenty of accessible credit for big businesses. All of this is great news.

At the same time, more than 50% of those who lost jobs due to the pandemic remain unemployed. Thirty million people continue to receive some type of unemployment benefits with approximately six million job openings right now, according to the Bureau of Labor Statistics. Some leading economists think it will take years to fully recoup our job losses in part because one in three small business owners expects to run out of cash this year if additional help isn’t received from Congress. And, according to a recent NPR poll, 50% of American households are facing serious financial problems.

The story of our economic recovery is a story of two Americas. Some people, and some industries, are experiencing tremendous success. The problem, though, is that other people and other industries are experiencing prolonged pain with no end in sight. These two distinct realities have led to what economists are calling a “K-shaped” recovery - a recovery with different directions for different groups/sectors. It is clear, based on the data from many regions around the country, that the new home industry is part of the upward trajectory.

Even as there are growing concerns around material cost increases, the fundamentals remain strong for the sector. Supply on the market is low but demand remains high, especially amongst younger buyers and those seeking to leave larger cities for the suburbs. Most importantly, interest rates remain low, ensuring that supply-side cost increases and demand-side price increases haven’t dramatically impacted most buyers’ ability to qualify. As there has been a large amount of pent-up demand for so long, it seems that many people are tired of waiting and willing to move forward regardless of these upward price pressures.

Moreover, new construction housing has overwhelmingly served the upper quartile of the economic ladder, a group that is doing quite well right now. For most, though not all, the pandemic has been more inconvenient than filled with economic hardship. Since this economic group overwhelmingly has money in the stock market, its asset base may have grown during this period. Furthermore, as most of the job losses came from the bottom half of our economy, there hasn’t been an income gap for the vast majority of these potential buyers.

While the negative impact to some individuals will ultimately have ripple effects elsewhere in the economy, there is no structural reason to expect the success of new construction housing to stop in the near term (accounting for seasonality). In addition, with the FED continuing to signal the desire to keep rates low for an extended period, credit for qualified buyers should continue to be accessible at terms that are incredibly favorable for those with a long-term mindset about purchasing.

It is difficult to celebrate success in a moment when so many are feeling pain, but the new housing market probably continues to be a bright spot in our challenging economic road back. What could change that? An increase in rates, an increase of resale supply, economic pain moving through the top of the economic ladder, and/or the economy having enough time to absorb the existing demand levels.