Three months ago, the U.S. economy registered the most monthly job losses in history. On Wednesday, it registered the biggest leap in existing home sales ever. The housing market has defied dire predictions during the coronavirus pandemic, with prices soaring to record highs.
What's going on?
Back in May, when we learned that the U.S. had shed 20.5 million jobs in a single month, it would have been reasonable to predict a housing market slump — one that was bad for sellers but good for buyers willing to shop during the pandemic. After all, in many parts of the country, open houses were banned during shutdowns.
A decade ago, during the Great Recession, which cost Americans about 9 million jobs, housing prices fell by roughly a third. There was fear that a pandemic-related recession might induce the same kind of reaction in the housing market.
But if you are out there bargain-hunting right now, you know that hasn't happened. Other than a very brief hiccup in spring, housing prices and activity have actually risen since Covid-19 hit — and median home prices hit an all-time high in June.
To be sure, there was an initial shock in the housing market. In early April, weekly mortgage application data fell by 17.9%. But even then, prices didn't collapse — there was just a brief game of freeze tag, as both buyers and sellers disappeared from the market together for a few weeks. Then, within a few weeks, purchase applications recovered to their pre-Covid level, and a classic "V"-shaped recovery ensued.
Here's why the housing market has remained so resilient.
In March, Americans didn't know how to react to the pandemic and began hoarding essentials — most notably, toilet paper. That's not happening any longer. Even though cases are rising in many parts of the country, the level of fear, and its impact on economic activity, is different now.
Housing expert and former mortgage broker Logan Mohtashami sees toilet paper hoarding as a leading indicator.
"In March people thought, 'I'm not going to buy a house right now. I'm not going to sell a house right now,'" Mohtashami, now lead analyst for HousingWire.com, says. "We don't see that right now even with the rise in cases. I do channel checks. The fear of the virus, the initial shock, put the housing market in a coma. But the country is starting to learn to live with the virus. After a few weeks, people said, 'Hey I'm still alive, I'm going to go through with the house sale.'"
Video by David Fang
In the years leading up to the 2009 housing crash, real estate prices were artificially inflated by speculators and various complex credit instruments. Homeowners in some states got used to 20% annual appreciation rates, which was unsustainable. More than 7 million existing homes were sold annually, a level that also proved unsustainable. In 2019, just more than 5 million existing homes were sold, according to Realtor.com.
Housing prices might feel high to house shoppers, but growth rates have been much more modest in recent years. And in 2019, median house prices actually fell in the U.S. for the first time in seven years, according to Zillow. So when Covid-19 hit, the market wasn't nearly as fragile as it was in 2009.
Despite all the layoffs and furloughs, there were still 133 million Americans with jobs, even during the worst of the economic shock in April. Roughly 5 million existing homes are sold every year, and roughly 20% are cash buyers. So the nationwide housing market only needs about 4 million mortgage borrowers annually for sales to be stable, Mohtashami says.
If you are looking to sell a home, the good news is that there are 72 million millennials (23-38-year-olds) in America right now, all moving into the stage of life when they'd traditionally buy a home. They're the largest such group in U.S. history.
"It seems odd to people that home sales aren't collapsing, but it's perfectly normal to me because housing is driven by demographics and mortgage rates, and in the history of America we've never had this good of a demographic [of potential homebuyers]," Mohtashami says.
Almost immediately after the coronavirus hit, the Federal Reserve dropped its benchmark interest rate to zero. The follow-on impact of that is mortgage rates continue to be among the lowest in history, recently falling below 3%.
It's hard to overstate the importance of cheap money and its ability to deliver lower monthly payments as a factor in propping up the homebuying market.
One other contrast with the Great Recession that shouldn't be ignored: This time around, mortgage forbearance plans were put in place almost immediately, with about 4 million of Americans taking the opportunity to delay monthly payments up to a year. The CARES Act, passed in March, made it relatively easy for homeowners struggling from the economic impact of Covid to stay in their homes.
That means a pandemic-related foreclosure crisis is off the table until at least 2021. That stands in stark contrast to 2009-2011, when empty homes started popping up all around the country, dragging down nearby housing values with them.
Won't there be bargains when all the urban dwellers escape to the country and leave their walkable condos behind? There certainly is a lot of chatter about people fleeing cities for the seemingly safer suburbs. After all, if you must stay at home, that's a lot easier if you can chill in your yard rather than on your fire escape. That's especially true if your commute is now and for the foreseeable future only a walk from your kitchen to your desk.
Some data supports this as a trend: Realtor.com says searches in suburban ZIP codes are up. Real estate sales activity in Manhattan has taken a big hit. Still, it's far too early in that process for urban prices to fall. And some experts are skeptical that urban flight will be a long-lasting trend.
"I don't put much weight into that. People have been leaving cities to go buy homes in suburbs forever," Mohtashami says. "You rent, you date, you mate, three and a half years later you have children and move into the suburbs. … Once the virus is gone and people can walk the Earth freely, let's see if people are really leaving the cities."
The housing market faces risks, too. Might it have another April moment, turning the V-shaped recovery into a W? If Covid-19 cases and deaths were to really explode, that could certainly happen. Mohtashami tells people to watch for runs on toilet paper: If that level of fear returns, the housing market could very well plunge again. But barring that kind of event, or a suddenly tight credit market that sends mortgage rates higher, he thinks the housing market will remain strong.
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