COVID-19 has already had a dramatic effect on the real estate market. In barely more than a month, the crisis has halted what was shaping up to be one of the most active spring sales seasons in history. These past weeks, we’ve seen home showings come down 18% relative to last year, weekly volume of new listings drop 49% year-over-year, and mortgage forbearances jump to 6% of all mortgages outstanding. Many of us are now anxiously wondering: what effect will this have on home prices?
Data from the housing market has given us valuable clues since the onset of the crisis.
Our team at Divvy has dug into numerous data sources in search of answers to that question. Below we’ve laid out two cases: 1. Prices remain relatively stable and 2. Prices are vulnerable to decline. Depending on which underlying factors and assumptions you believe can help you better form an opinion on which path you think is more likely.
Based on our research, we think it is possible that home prices in the US could remain flat over the next 6-12 months and not suffer any substantial long-term drops due to COVID-19 if the economic effects of this crisis are limited to just a few months. However, that is a big “if”, since the past six weeks have seen key metrics that drive the economy deteriorate faster than in any previous crisis in recent memory.
Case 1: Prices Remain Relatively Stable
The case for stable pricing of homes is hinged around basic supply and demand principles. As detailed below, data since the onset of COVID-19 has demonstrated that the supply of homes on the market will be reduced even more dramatically than buyers’ demand in the near-term, which would likely allow prices to remain stable for the next several months.
Sellers Still Have the Power
Homeowners considering selling have consistently been in strong positions leading up to COVID-19, and the data coming out of the first few weeks of the crisis indicates that they are still in the driver’s seat in the market.
New listing volume was already declining on an annual basis in many areas before the crisis, further constraining supply heading into 2020. And now, according to a survey by the National Association of Realtors (NAR) earlier this week, 55% of Realtors are working with clients that have chosen to delay selling for a couple of months and an additional 8% are working with clients who have delayed indefinitely. Similarly, Redfin has estimated that weekly volume of new listings has dropped 49% year-over-year, while new homebuyer demand has come down only 25%.
Source: NAR Flash Survey: Economic Pulse April 19-20, 2020
How are sellers in a position of such strength?
In mid-March, Fannie Mae and Freddie Mac took immediate action instructing servicers of government-backed loans to offer borrowers moratoriums on payments of up to twelve months if they are suffering hardship related to COVID-19. Servicers of conventional mortgages have offered borrowers reprieves as well. The wide availability of these programs will help to prevent homeowners from having to immediately sell their homes in the event of financial hardship due to COVID-19, thus allowing homeowners to wait out the crisis over the near term and keeping supply low.
Buyer Interest Is Rebounding
While buyer interest did not crater to the extent that listing volume did in mid-March, it did experience a substantial shock. As can be seen in the chart below, home showings began a fast fall starting March 11 that lasted through the first two weeks of April. Home showings in March alone came down 18% relative to last year
However, showing volume has rebounded approximately 50% over the past two weeks, indicating that some buyers who had pulled back at the beginning of the crisis are resuming their home searches. National real estate brokerage Redfin has also seen buyer demand start to rapidly recover since the beginning of April, as can be seen below.
Furthermore, virtual tours and digital closings have been rapidly deployed over the past month. While we do not expect interested buyers to complete purchases at the pre-crisis rate when relying solely on virtual methods, it gives room for transactions to continue.
Case 2: Prices Are Vulnerable to Decline
While the above are certainly reasons for optimism, our primary concerns when considering home prices’ trajectory are the unprecedented speed with which COVID-19 has fueled an increase in unemployment and uncertainty as to how long it will take to recover.
This Is an Extraordinary Economic Hole
Persistent unemployment anywhere near its current levels could eventually cripple buyers’ ability to purchase and force a large number of homeowners to sell due to financial hardship.
In the past five weeks, the total number of jobless claims in the U.S. has ballooned from 7.1 million to 26.5 million. This has resulted in the highest unemployment rate since the depths of the Great Depression in 1934. For further context, the peak unemployment level during the Great Recession was 15.3 million in April of 2010. Our current level would have to drop back down about 42% just to reach that benchmark. Most concerning about this dizzying number is that we cannot know how many of these newly unemployed Americans will be quickly rehired as social distancing requirements are incrementally relaxed across the country.
In addition, the CDC has warned that there is a possibility of the virus resurging in the fall. This could cripple, if not unravel, any recovery in unemployment made up that point.
With these factors in mind, we cannot rule out the possibility of substantial unemployment lasting deep into 2021. Should that occur, the resulting widespread financial hardship could choke buyer demand and force substantial numbers of owners to sell, forcing prices lower in response.
Homeowners are Already Showing Signs of Distress
Today there are 3.4 million borrowers already in forbearance. This number will likely rise further, since only one payment period has passed since the worst economic effects of COVID-19 set in. This current number of forbearances amounts to approximately 6.4% of mortgages in the US. Compare this to the 3.7% of mortgages that were in delinquency at the beginning of the Great Recession in Q1 2008. It’s important to call out that forbearance is not the same as delinquency, but if the economy does not recover enough for those homeowners to resume their payments within the 3-12 month forbearance periods, many of those owners could be forced to sell in order to escape their payments, which would substantially increase the inventory of homes on the market.
Buying a Home May Become Even Further Out of Reach
Another point of concern is that lack of access to homeownership is rapidly accelerating for first time buyers and lower income populations.
Even though mortgage rates are near historic lows, the Mortgage Credit Availability Index (MCAI) – a key indicator of affordability – dropped 16.1% in March. When it drops, this means that those with lower down payments or credit scores are increasingly barred from homeownership.
Source: Mortgage Bankers Association (MBA)
Major lenders like JP Morgan Chase are raising minimums for qualification as high as 20% down and a 700 credit score for conventional mortgages, and issuers of government-backed loans are becoming increasingly strapped for resources as they bear the costs of mortgage forbearance mandated by the CARES Act.
As lenders tighten restrictions and government-backed mortgage servicers face diminished resources, those for whom homeownership had just started to become possible will likely find it out of their reach again. This sharp decrease in demand alongside the increase in supply would drive home prices down.
Our goal at Divvy is to permanently bridge that gap by making homeownership accessible to everyone. Now more than ever, we believe that it’s crucial to provide a pathway to homeownership for people who can’t meet the heavy upfront demands of a mortgage. At the same time, we believe that the uncertainty in the state of the overall economy necessitates caution in buying. Therefore, at Divvy, we’re focusing more than ever on the inherent quality of the home and its location because we have responsibility for our future homeowners to ensure we are investing in a home that will continue to appreciate and build wealth for our customer.