The US economy got crushed in the second quarter, with the worst decline in real GDP for any quarter since the Great Depression. However, the long road to recovery has started and, for now, we're penciling in real GDP growth at a 20% annual rate for the third quarter. Of all the parts of the US economy that have weathered the COVID-19 storm, none has been as resilient as the housing market.

Homebuilders started homes at a nearly 1.6 million annual rate in December, January, and February, before the Coronavirus and government-mandated shutdowns wreaked havoc. Those were the best three months since 2006 and showed that residential construction had finally fully recovered from the housing implosion that was a center point of the last recession.



Then, during the shutdowns, homebuilding plummeted: housing starts bottomed at a 934,000 annual pace in April, before gaining in May, June and July, hitting an almost 1.5 million pace last month.

We have been saying for the past several years that the fundamentals of the housing market suggest an underlying norm of 1.5 million housing starts per year. This is based on a combination of population growth (more people mean more housing) and scrappage (homes don't last forever, either because of voluntary knockdowns, fires, floods, hurricanes. tornadoes,...etc.).

However, in the ten years ending in February (March 2010 through February 2020) builders had only started 1.011 million units per year. Part of this made sense: home builders started too many homes during the housing bubble and the only way to work off that excess inventory was to build fewer homes than normal. But, in our view, the inventory correction went too far. In the 20 years through February (March 2000 through February 2020), housing starts only averaged 1.265 million. Too low.

All of this suggests to us that home builders still need to make up for lost time, until the long-term average is closer to 1.5 million per year, which could mean reaching, and then averaging, a pace of something like 1.8 million starts for the next several years.