Housing Market

    Is the housing market going to crash?

    Quarantine has transformed a stable U.S. real estate market into one that is increasingly fragile. Government intervention will determine the severity of its impact on housing.

    Is the housing market going to crash?

    Housing demand will decrease. Home supply should increase. Tens of millions of unemployed will increase mortgage delinquencies. Keeping these people in their homes and avoiding foreclosure will be the determining factors for how hard this will hit the overall housing market. Without proper intervention from mortgage lenders and government leadership, housing could crash. This crisis requires a measured, dramatic response.

    As coronavirus rips through the United States, the future is uncertain. There will be many conversations and second guessing once things begin to return to normal. Were we prepared as a country? Should we have kept things closed longer? Reopened sooner? What more could have been done?

    While those questions demand answers, they focus on the past. What about the future?

    • How long will it take businesses to rebound?
    • Will jobs come back?
    • How will business closures, lost jobs, and other consequences of coronavirus impact the housing market?

    What does a health pandemic have to do with the housing market?

    The effects of coronavirus and the collective response to it will have a significant impact on the U.S. housing market. Medical directives to social distance and shelter in place are critical to keeping our healthcare system from becoming overwhelmed. While necessary, they are dealing a massive blow to small businesses, corporations, and perhaps most importantly, their employees. All of which dramatically affects housing.

    Home Sales Indicate a Healthy Housing Market

    One of the primary factors that determines home values is basic supply and demand. If there are enough buyers willing to bid up home prices, home values tend to increase, and the housing market is deemed healthy. This includes first-time homebuyers, families upgrading to larger homes, empty-nesters downsizing, vacation homebuyers, etc... Record unemployment affects every group of homebuyer.

    Jobless claims tallied nearly 15 million over the last few weeks and will continue to grow as layoffs and business closures increase. If people are out of work or uncertain of their future income, buying a house becomes an afterthought. Additionally, saving money for a home while unemployed is difficult, if not impossible. Many families will burn through their savings while on furlough, leaving fewer funds available for a down payment. Income insecurity and depleted savings will decrease housing demand.

    A recessed economy impacts both sides of the housing market. While demand will decrease due to lost wages and savings, supply will increase. More homes will enter the market as newly unemployed homeowners scramble to stay afloat. Some will attempt to sell because they need the money. Some will relocate to find employment. Many will be forced to sell to avoid foreclosure. An influx of homes added to existing inventory slows or stalls price appreciation. Coupled with a significant demand decrease, home values could fall.

    On a micro level, a home's value is often determined by how desperate the seller is to part with their home. A homeowner with no need to sell might only take top dollar, or not sell at all. A market filled with this type of seller creates a housing boom. A market composed of desperate sellers and few buyers could lead to a housing recession. While this scenario is problematic, a housing crash is not inevitable. What might tip a problematic housing market into an all out crash? Foreclosures.

    Foreclosures

    Without intervention, mortgage delinquencies will skyrocket. St. Louis Fed President James Bullard projected unemployment could reach 32%. Even if unemployment lasts only a few months, many will miss mortgage payments. Missed mortgage payments, if not remedied, lead to foreclosures. Mass foreclosures reverberate through a housing market. It can take years before a foreclosed homeowner can qualify for another mortgage. This prolongs a recessed housing market by removing a capable buyer once they are back on their feet.

    How does this compare to the 2008 recession? 2008 was only twelve years ago. The impact foreclosures had on the housing market and world economy are fresh. While homebuyers take some responsibility for 2008, coronavirus delinquencies stem from government leadership. This is not meant as criticism. Homeowners were instructed to stop going to work, to stop shopping, to stop eating at restaurants. Massive unemployment leading to missed mortgage payments came from suppressing a global pandemic. Such steps were drastic and necessary. The government response to housing should be no different.

    Mandating creditors to not report delinquent accounts to the credit bureaus was a good start. This should help prevent future homebuyers from being denied credit. Future homebuyers are essential to keeping the housing market above water. A healthy market needs qualified buyers.

    The government's response to foreclosure candidates will determine its impact on housing. The lessons from 2008 should equate to a dramatic response. Without one, the housing market could see a broader, more severe crash than 2008.

    Unemployment is everywhere. While 2008 had areas harder hit than others, this crisis, from an unemployment standpoint, is more widespread. Regardless of the presence of coronavirus in a given community, businesses are shutting down and laying off employees.

    If congress and the executive branch are able to work with mortgage lenders, damage to the housing market can be mitigated. Forbearance, deferring payments, interest payments, etc... can all be used to cushion the blow and keep foreclosures down.

    What needs to happen to keep the real estate market on track?

    Housing demand will decrease. Home supply should increase. Tens of millions of unemployed will increase mortgage delinquencies. Keeping these people in their homes and avoiding foreclosure will determine how hard the hit to the housing market will be. Without proper intervention from mortgage lenders and government leadership, housing could crash. This crisis requires a measured, dramatic response.