The REconomy Podcast™: What Would the Economy and Housing Market Look Like if the Pandemic Never Happened?

In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi discuss what may have happened to the economy and the housing market if the COVID-19 pandemic had never occurred.

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Listen to the REconomy Podcast™ Episode 63:

“Recall that nominal house price growth was exceptionally strong over the pandemic, peaking at nearly 21% in the spring of 2022. It has since come down from that peak. But, even with those price declines from peak, house prices today are 21% higher than they would have been if growth had continued at the pre-pandemic trend.” – Mark Fleming, chief economist at First American


Odeta Kushi - Hello and welcome to episode 63 of the REconomy podcast, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey, Mark. You know, in preparing for this episode, I got to thinking a lot about what could have been, had the pandemic never occurred.

Mark Fleming - Hi, Odeta. I do enjoy the good, old-fashioned counterfactual. But, what exactly do you mean?

Odeta Kushi - Well, in the context of the economy, the labor market and the housing market, a lot changed because of the pandemic, the stay-at-home orders and the Fed's response to the COVID-19 recession. Had it never happened, would our labor market have such a severe supply and demand imbalance? Would inventory be so low today? Where would house prices be?

Mark Fleming - Yes, but I simply can't resist here. The '80s reference, Back to the Future. Anyone? Anyone? Actually, that's a double '80s movie reference right there. What would have happened had Marty McFly's parents not met?

Odeta Kushi - Well, we would have missed out on a great American science fiction-comedy franchise. That's what would have happened.

Mark Fleming - Back to the Future is science fiction, interesting.

Odeta Kushi - Yeah, it's science fiction, right?

Mark Fleming - I suppose so. And there's a Back to the Future musical coming soon to Broadway. Okay, but back to the present. Lots of questions there. But I do think they are questions worth answering. I'm especially curious where house prices would be today had we not had the double-digit annual price growth over the last couple of years.

Odeta Kushi - But I think, first, we have to talk about how the pandemic changed the economy more generally.

Mark Fleming - Ah, yes. And for that, where to start. Well, at the beginning of the pandemic, as I'm sure you and every one of our listeners recalls. In the early spring months of 2020, shutdown orders were in place.

Odeta Kushi - I very vividly recall. I remember driving around to four different grocery stores to find paper towels.

Mark Fleming - I'm thinking of all the things you could have picked, you picked the paper towel reference.

Odeta Kushi - It was traumatic trying to find those things.

Mark Fleming - I suppose it could be. We were focused on buying goods for in-the-home use, such as those paper towels, groceries, but more importantly, things like exercise bikes, workout benches, all of the other goods that we were going to use now in those homes. That means we were spending a lot more on goods, but not so much on those services that we weren't able to use, like going out to eat or getting our hair cut at a salon or, in my case, the barber shop. Had that pandemic never occurred and the trend for goods and services spending continued at their pre-pandemic pace, where would spending be today, Odeta?

Odeta Kushi - Well, goods spending today would actually be less than it currently is, while services spending would be higher.

Mark Fleming - So we're still spending a little more than we used to on goods relative to services. That makes sense, since we underspent on services and overspent on goods due to the pandemic conditions. And we know that those pandemic patterns affected the overall economy and also, more importantly, the labor force relative to goods and services.

Odeta Kushi - It sure did. So, if we were to sort of extrapolate the labor force participation rate, for example, starting in March 2020, using a linear trend from 2016 until February 2020, we find that the labor force participation rate would be 63.5%. Today, the actual labor force participation rate is 62.6%. So, we're about a full percentage point away from that counterfactual.

Mark Fleming - But, what's more interesting here is where we would have been. 63.5% is only modestly higher than the 63.3% participation rate from before the pandemic. Participation was already trending downwards before the pandemic hit, is that what was happening?

Odeta Kushi - That's right, there was a long, sort of downward trend since the end of the Great Financial Crisis, in part, because the participation rate is heavily influenced by demographic shifts and, in this case, baby boomers aging into retirement. We would have had people retiring, whether the pandemic happened or not, it's just that the pandemic pulled forward some of that retirement. Now, what about other economic health metrics, such as the GDP and job growth? How are we doing today compared to where we would have been, had the pandemic never occurred?

Mark Fleming - Both GDP and job growth have rebounded tremendously in the aftermath of the COVID recession. We know about how quickly that rebound occurred. But, even so, we are not back to where we would have been if job growth and GDP had continued at its five-year, pre-pandemic pace. In other words, the size of the economy is not yet back to where we would have been without the pandemic. It's like the economic version of long COVID.

Odeta Kushi - Yeah, so the economy and labor market are strong, but night not quite where we could have been had the pandemic never occurred. The recovery is, of course, taking a long time.

Mark Fleming - Right, of course, it's not certain that the economy or the labor market would have continued on that five-year, pre-pandemic trend. Maybe something else would have happened. But it's still good to ask that, what if question.

Odeta Kushi - Like, what if the pandemic hadn't changed the way that we use our homes, because we know when the pandemic hit, suddenly our homes became a gym, a daycare, a restaurant, a hair salon, everything?


Mark Fleming - Yeah, all those goods that I bought to make my home into something other than just a home, broadening the role of the home in American life, coupled with record-low mortgage rates and limited housing supply, powering the housing market to multiple records during this unprecedented time -- the fastest annual house price appreciation, the lowest days on market in the history of record keeping, and a near-record annualized pace of sales. Here, it seems we must ask, what would have mortgage rates been had the pandemic never happened?

Odeta Kushi - Well, the average 30-year, fixed-rate mortgage from 2016 until the start of the pandemic in the early months of 2020 was about 4%. So, if we were to take the five-year trend and extrapolate, the mortgage rate to today would be about 4.4%.

Mark Fleming - Not too hot, not too cold, maybe just right. But, instead, we had a mortgage rate that was rock-bottom low in 2020 and 2021. And then, turn around, inflation shows up. The Fed tightens monetary policy. And now we have it much, much higher. The Fed was loosening all these financial conditions over the pandemic to stimulate the economy, which resulted in the ultra-low mortgage rates. But, ironically, that loosening contributed to the white-hot housing market and the inflation that we have talked so much about on this podcast. Now, the Fed has to tighten monetary policy to cool inflation in the housing market, along with it, through higher mortgage rates.

Odeta Kushi - That's right. And that ultra-low mortgage rate over the pandemic resulted in an exceptionally high number of home sales, and the subsequent rise in mortgage rates resulted in collapsing home sales.

Mark Fleming - Well, in the spirit of this podcast episode, you know what I'm going to ask next? What would sales have looked like if that pandemic had never occurred? And, presumably, the mortgage rate had not been so volatile as a result.

Odeta Kushi - Great question. Well, mortgage rates went low, sales went high. And, of course, today, the opposite is true. Had we had the steadier rate path that we just discussed, total home sales today would be about 6 million, instead of 5.2 million.

Mark Fleming - So that's total, listeners, which means both existing- and new-home sales. What would existing-home sales be alone? I think that's probably what most people are more familiar with.

Odeta Kushi - So, existing-home sales would be just over 5 million annualized.

Mark Fleming - Okay, so that's still significantly more than the current annualized pace of 4.4 million existing-home sales.

Odeta Kushi - Absolutely. And instead of peaking at 6.7, a whopping 6.7 million, sales in October of 2020, we would have had a steadier couple of years of sales with an average of 5.3 million sales, an existing-home months' supply would have stayed around three months instead of about two-and-a-half, which would have made for a much more balanced market.

Mark Fleming - That's true and interesting, but it's still below what is usually considered a balanced market at six months. In other words, inventory was short, even before the pandemic.

Odeta Kushi - Exactly. That's because the housing market was suffering from a supply and demand imbalance, even before the pandemic and, of course, the pandemic worsened that dynamic. That's what contributed to soaring house prices.

Mark Fleming - Well, since we're on the topic of house prices, recall that that nominal house price growth was exceptionally strong over the pandemic, peaking at nearly 21% in the spring of 2022. It has since come down from that peak. But, even with those price declines from peak, house prices today are 21% higher than they would have been if growth had continued at the pre-pandemic trend.

Odeta Kushi - Wow. So, even with the price declines from the peak, national house prices are significantly more elevated than where they might have been had the sub-3% mortgage rates of the pandemic never occurred.

Mark Fleming - That's right. But real estate is, as we say, local. So what about the market level?

Odeta Kushi - Well, we repeated this analysis for all of the top 50 markets and we found that all but two markets have a house price level far above what it would have been if house prices had increased at the pre-pandemic pace.

Mark Fleming - Wait a minute, wait a minute. There are markets where that isn't the case?

Odeta Kushi - Yep. Two markets. Care to take a guess?

Mark Fleming - I can't resist this one. I'll guess one. Hill Valley, California. Anyone? Anyone? Marty's hometown. But, if you're asking about a real place, let's go with San Jose.

Odeta Kushi - I was indeed asking about real place. Well, how did you get San Jose?

Mark Fleming - Because whenever it comes to housing prices, you're good picking one of those northern California markets. And, more seriously, I do recall in our latest Real House Price Index, or RHPI, report, of all the top 50 markets, San Jose was the one that had experienced the most severe price declines from the peak.

Odeta Kushi - We are definitely on to something there, because the other market where house prices today are lower than they might have been at the pre-pandemic pace is San Francisco. San Francisco experienced the second largest price decline from the peak of the top 50 markets.

Mark Fleming - So, are these northern California markets overcorrecting? Or was just the pre-pandemic pace of growth already strong to begin with?

Odeta Kushi - Well, we can't know for sure. But I do think it's the latter, that the pace of growth pre-COVID was too strong and not sustainable. And I say that because, even with double-digit price declines from the peak, San Jose and San Francisco are still considered overvalued markets. Now, if you recall from earlier episodes, we did define overvaluation as a situation where the median sales price of a home in a given market outpaces the median house-buying power or how much someone can afford to buy. But it is important to note that across the other top 48 markets, house prices remain on average 20% higher than they would have been at the pre-pandemic pace.

Mark Fleming - That's a pretty big number considering this has all happened over basically a little more than just two years.

Odeta Kushi - It sure is. Well, I think we very thoroughly covered what could have been, had the pandemic conditions never manifested. Of course, the counterfactual may not always be reasonable, but it's still interesting to compare what could have been. Well, that's it for today. Thank you for joining us on this episode of the REconomy podcast. If you have an economics related question you'd like us to feature in the future, you can email us at economics at first We'd love to hear from our listeners. And as always, if you can't wait for the next episode, you can follow us on Twitter. It's @OdetaKushi for me and @MarkFlemingEcon for Mark until next time.



This transcript has been edited for clarity.

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