Recent economic indicators have shown some signs of a recovery in the US housing market along with the wider economy, with data since May pointing to a strong rebound in building permits, rising confidence among homebuilders, and a marked improvement in labor market conditions as states gradually reopen their economies.

However, with a large number of people still unemployed, and the surge of new Covid-19 cases in the southern and western parts of the US showing no signs of abating, significant risks remain about the timing and strength of the recovery.

The surge in new Covid-19 cases in some states, especially in California, Texas, Florida, Arizona and Georgia is expected to slow the ongoing recovery of the labor market and prevent a stronger rebound in the residential construction sector over the coming months. On 3 July, the number of daily coronavirus cases in the US surpassed 57,500 for the first time ever, driven by record rises in California, Texas, and Florida, the country’s most populous states. This has alarmed health officials and forced local governments and businesses to halt or reverse their reopening plans.

According to the US Census Bureau, building permits for future home construction registered a monthly increase of 14.1% in May after declining by 21.4% in April. Nevertheless, on a year-on-year basis, building permits continued to decline in May, dropping by 9.1% following a 19.8% fall in the previous month.

Homebuilders sentiment has also improved amid record lows interest rates and rising demand for single-family homes. The National Association of Home Builders/Wells Fargo Housing Market Index continued to rebound in June from the nearly eight-year low of 30 posted in April, jumping to 58 from 37 in May, the biggest increase on record. A rating above 50 signals favorable sentiment.

Furthermore, 4.8 million additional jobs were added in June compared to 2.5 million jobs added in May, and the unemployment rate fell to 11.1%, according to the US Bureau of Labor Statistics. Significant job gains were registered in retail trade, education and health services, manufacturing, and professional and business services.

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In construction, 158,000 jobs were added in June, following an increase of 453,000 in May. These increases make up for more than half of the declines registered in March and April (-1.1 million in total). Notable monthly gains were registered in speciality trade contractors (+135,000), with growth about evenly split between the residential and non-residential segments while 32,000 jobs were added in the buildings segment. The Bureau of Labor Statistics said that the improvements in the job market reflected the continued resumption of economic activity that had been curtailed in March and April due to the coronavirus pandemic and efforts to contain it.

Home construction in the US is estimated to have dropped sharply in the second quarter, in line with the steep decline in economic activity. Data from the US Census Bureau showed that housing starts, a leading indicator of current residential construction activity, rose by 4.4% in May, indicating only a small improvement from the cumulative drop of 45.4% registered in March and April. Nonetheless, on a year-on-year basis, housing starts dropped by -23.2% in May and by -26.3% in April.

While new home sales are expected to rise during the summer as the easing of lockdowns in some states will release pent-up demand although to a certain extent, elevated unemployment levels, low housing supply and uncertainty about the coronavirus crisis will keep a large segment of potential buyers on the sidelines.

Data from the National Association of Realtors indicated that new home sales were up almost 17% in May compared to April while sales of previously owned homes, which makes up about 90% of US home sales, fell by 9.7% in May from the month earlier to an annualized 9.91 million as lockdowns and social distancing measures continued to depress activity despite low mortgage rates. This was the third consecutive month of declines and the lowest level since October 2010. In addition, housing completions dropped by 7.3% to 1.1 million compared to the previous month, the lowest level since December 2018.

Overall, activity in the housing market is expected to remain well below the pre-Covid-19 levels over the next several months given the still elevated unemployment levels, renewed lockdown restrictions and concerns about the speed at which the coronavirus is spreading in major US states. Housing supply-side challenges, including homebuilders’ access to loans and building material availability will also continue to affect the market.

The degree of persistent social distancing (both voluntary and compulsory) and risk-averse behaviours that will prevail in the second half of 2020 and in 2021 will determine whether the housing market and wider economy will make a quick recovery or will need additional stimulus to endure the Covid-19 pandemic crisis. Even with a full reopening of the economy consumers are likely to remain cautious about their spending in the long-term.