February brought an end to the nation’s longest economic expansion. The economy had begun to slow even before the pandemic-induced economic lockdowns resulted in an unprecedented 31.4% slide in real (i.e., inflation adjusted) GDP in the second quarter of 2020. Fortunately, the combination of quick and aggressive actions taken by the U.S. Congress and the Federal Reserve Bank generated a significant economic bounce as real GDP growth rose sharply in the third quarter (33.1%), albeit on a much lower base of economic activity. Given ongoing policy efforts to limit the spread of the COVID-19 virus, it is not surprising that real GDP remains slightly below its pre-pandemic level. However preliminary indicators do suggest modest growth in the fourth quarter. This will hopefully result in a relatively normal recession, at least in terms its length. Note that the average post-war recession lasted 11.1 months.
The National Bureau of Economic Research (NBER) is the organization that officially defines the precise month in which a recession begins (the current recession began in February 2020), and the month in which it ends. The NY Federal Reserve Bank tracks the components of real GDP in real time and their preliminary estimates suggest modest growth in the range of 2.5% in the fourth quarter. While this is good news, we will need to see sustained growth in income and employment before the NBER concludes that the recession has officially ended. Once vaccines have been widely distributed, we expect economic activity to return to pre-pandemic levels.
While the economic recovery might not be V-shaped, the Wisconsin housing market recovered very quickly after a short three-month decline between April and June. This largely coincided with the timing of the economic lockdown of the state. The president declared a National Emergency in mid-March, and given the lag between an accepted offer and a closing, the impact of the virus began to show up in April home sales, where the number of closings slipped 4.7% compared to April 2019. On an annualized basis, May sales declined far more dramatically (-23.4%), but by June they were down just 1.7% relative to their levels 12 months earlier. The July through October period of 2020 revealed average growth in closed sales of 14% compared to that same four-month period in 2019. Indeed, Wisconsin is on record pace to sell more homes in 2020 than in any year since the Wisconsin REALTORS® Association re-benchmarked its data collection methods back to 2005, something that seemed nearly impossible in May.
Why have home sales increased at such a robust pace even though the state labor market, while improving, is still considerably weaker than last year? The simple answer is that record low mortgage rates have created a significant spike in housing demand. Prior to 2020, the 30-year fixed rate mortgage had been at its lowest point in November and December of 2012, when it fell to 3.32%. That rate was 3.31% in April of this year, and it has hit new record lows every month since that time. In November, the 30-year rate stood at 2.77%, which is 93 basis points below the November 2019 level. What is remarkable is that sales are growing at a record pace even though inventory levels signal a strong seller’s market. Six months of available supply is considered to be a balanced market, and Wisconsin had just 3.3 months of supply in October, which is down 31.3% from the 4.8 months of inventory just 12 months earlier. Not surprisingly, strong demand and weak supply continue to drive prices upward. On a year-to-date basis through the end of October, the Wisconsin median price rose 11.1% to $220,000 compared to the first 10 months of 2019. Still, housing remains relatively affordable due in large part to the record low mortgage rates. The Wisconsin Housing Affordability Index shows that fraction of the median priced home that a typical buyer with median family income can afford to buy given 20% down and the remaining balance financed with a 30-year fixed rate mortgage at current rates. In October, this index was at 199, suggesting that a buyer can afford to purchase nearly twice the median income in the state. Although affordability has fallen 6.5% relative to 12 months earlier, it remains higher than the national index. The national Housing Affordability Index published by the National Association of REALTORS® was at 160 in September (the latest data available at press time), and this is about 18% lower than the comparable September index value for Wisconsin.
A presidential transition, especially when it also involves a change in political party carries with it substantial uncertainty since the two parties have very different views of the appropriate roles of the private versus public sectors in the economy. Still, there are several reasons to be optimistic about the future. First, the primary drag on the economy is the ongoing pandemic, and the restrictions on economic activity currently used to control the virus. With the imminent distribution of a vaccine, we believe that constraint will be effectively lifted in the first half of 2021. Second, the Fed has indicated that it will keep short term interest rates near 0% for the foreseeable future. They view the risk of inflation as minimal and they are committed to expansionary monetary policies to stimulate growth. As long as inflation remains low, this bodes well for continued low mortgage rates in 2021. Third, assuming a Republican-held Senate, a divided federal government should keep the regulatory burden in check. At the state level, once the pandemic has ended, policymakers need to move quickly to fully reopen the state economy. Only then will we see employment levels return to pre-recession levels. In addition, working to reduce the regulatory burden on new residential construction will help to ease supply limits in the state. Finally, although state legislators have little control over local property tax decisions, maintaining a tax environment that is favorable to business formation will continue to support the housing market.
Founded in 1909, the Wisconsin REALTORS® Association (WRA) is one of the largest trade associations in Wisconsin. It represents and provides services to more than 16,500 members statewide. WRA’s goal is to help REALTORS® enjoy successful careers and stay competitive in their local markets by offering hundreds of products and services.