The housing market could take a negative turn in the coming months.
© 2017 Bloomberg Finance LP
The U.S. housing market got off to a bright start this year, but as the coronavirus crisis grips the country, dark clouds are hovering over the spring home buying season. And home sales will likely be much lower than had previously been expected.
Frank Nothaft, chief economist for data analytics firm CoreLogic, said home price appreciation was in a prime economic growth state prior to the pandemic with low mortgage rates, rising family income and a lean inventory of homes for sale to kick off the year’s quick growth.
“There was plenty of job growth,” he said. “In February, we hit 3.5% in unemployment, matching a 50-year low, so all the signs were really great for a strong home-buying spring. But the COVID pandemic hit, and that has just changed the complexion of the marketplace 180 degrees.”
Meanwhile, the number of new for-sale listings and loan applications to purchase homes has declined. “This is usually the time of year when we’re entering that spring home-buying pick-up in activity,” explained Nothaft. “And normally we see mortgage applications rising at this time of year, but they are going down.”
Amid the tight supply of homes, sales are likely to be very weak in the spring home-buying season, said Nothaft, adding: “Completely opposite from what we anticipated just six weeks ago. So how that affects house prices, we’ll have to wait and see how that all plays out.”
If strong demand among first-time buyers is any indication, home price growth could be maintained at a pretty good pace over the next few months.
“Again, it’s really hard to say,” said Nothaft. “A lot of uncertainties are out there. And certainly some of the challenges out there are large numbers of workers who have had to file for unemployment insurance claims. As you know, if you are unemployed it’s almost impossible to qualify for a mortgage loan. And if you can’t qualify for a mortgage loan, that pretty much prevents you from buying a home.”
Nothaft said the coronavirus stimulus package could be the economic lifeline for a home purchase.
“If you have multiple income earners in the family, let’s say it’s a couple, and one of them has a salaried job that has not been impacted by the pandemic, and the other one has lost their job but perhaps is getting some additional support through the CARES (Coronavirus Aid, Relief, and Economic Security) Act, that might be sufficient to support the underwriting of the mortgage for a home purchase,” he explained.
In addition, Nothaft said, “If you already are in your home, and you’re looking to refinance, and you’re not doing a cash-out refinance just a straight rate and term refinance — lowering your monthly payment, lowering your interest rate with the same lender — then they will probably be more likely to factor in any challenges, any temporary shortfall of income that you may have because lowering your monthly payment through a no cash-out refinance helps the lender by making it more likely that you as a homeowner can continue to make those payments going forward.”
Nothaft said that in the event of a delinquency, the government-sponsored enterprises and Federal Housing Administration have issued guidance on supporting forbearance during the nation’s unprecedented shutdown of economic activity.
For the 20 urban markets covered by the S&P CoreLogic Case-Shiller Indexes, Phoenix topped the leader board in price growth for the eighth consecutive month, rising 6.9% from January 2019 to January 2020. The metros that followed were Seattle; Tampa, Florida; and San Diego, each experiencing price growth of 5.1%. All of these markets have had strong population growth and local economies fueling home purchases.
New York (0.8%) and Chicago (0.6%) reported the smallest 12-month gain of the 20 metros. The Census Bureau reported that Illinois and New York had an annual decline in population between 2018 and 2019.
“Phoenix has been going strong, especially for the lower-priced segment,” said Nothaft. “It’s in low supply and in strong demand so price growth has been very good. Phoenix has topped the list in terms of price growth among the 20 urban areas for eight straight months.”
Nothaft finds it shocking to see how the housing market has swung around over the last month. “Even towards the end of February things were still looking pretty good,” he pointed out. “And here we are now at the end of March, and it appears pretty certain that the economy is ratcheting into a recession, and that’s going to pose a whole variety of challenges for the housing market. In a recession, home sales fall. That’s always been the case. And that’s because with layoffs, potential home buyers do not have income that they need or the financial security that they want to make a big purchase like buying homes.”
An economy teetering on the brink of recession has a significant dampening impact on home sales, said Nothaft. “Compounding it all is that with the pandemic, many jurisdictions have a shelter-in-place requirement,” he explained. “And if you’re sheltering in place, if you’re a family that had listed your home for sale or was planning to list your home for sale, you’re probably talking to the agent and saying, no, let’s cancel the open houses. I don’t want anyone coming to our home.”
He said, “And likewise, many potential home buyers who may have income, they haven’t lost their job, mortgage rates are low, they are in a good position to buy, they may be saying, whoa, let’s hold on a moment. I’m not sure I want to go to some strange person’s house given this concern about the virus. And, gosh, I’ve heard we’re going into a recession. I’m not sure it’s a good time to buy now. Let’s just wait and see what happens. So on both sides, potential home buyers or potential home sellers, they’re both kind of very skittish — canceling open houses, pulling back inventory from the market, which also works to dampen the volume of home sales.”
Would-be home buyers might be less skittish about vacant homes listed for sale. “Some homes that are listed for sale are currently vacant,” said Nothaft. “The homeowner or whoever occupied moved out a month ago, two months ago, and the home has been put on the market as vacant. So in that case, a potential home buyer probably has very little concern about going with an agent to see a home that has been vacant on the market listed for sale.”
He added, “And if it’s a good match and they make a bid on the home and win the bid, it’s also more likely that the mortgage loan will be underwritten probably more quickly because the appraiser doesn’t have to wait for permission from an occupant to visit the home. The agent just needs to let the appraiser in to do the interior inspection, and it may actually facilitate a more straightforward or more rapid underwriting and settlement on the mortgage loan.”