If the Great Recession never happened, how would potential homebuyers be looking at today’s housing market?
After all, the giant cohort of potential homebuyers now in their late 20s and early 30s was also the generation fresh out of college trying to find a job as the market was crashing in 2008. They remember the struggles of trying to find a job, and they remember the large swath of inventory on the market that made home prices drop lower and lower.
So when it comes to deciding whether or not to buy a home in the middle of a recession, it’s difficult not to pull in past memories from the Great Recession. But this is a very different kind of recession, and, as Ralph McLaughlin, chief economist and senior vice president of analytics at Haus, said: “No housing analyst alive has seen the housing market perform during a pandemic.”
McLaughlin noted that in this economic downturn, policy plays a much larger role in what’s going to happen with the health of the housing market than fundamental economics.
Back in April – during what should’ve been the year’s busiest home-buying season – McLaughlin talked about whether or not it was a good time to buy a home. At the time, he noted that the largest group of first-time homebuyers, Millennials, are going to be the most susceptible to recency bias when it comes to recessions. “They basically only went through one, the Great Recession, and that sample size of one just happens to be the worst economy for the housing market since the Great Depression,” said McLaughlin.
Since that interview three months ago, the housing economy has proved to be extremely resilient to the current crisis, thanks to some significant actions by the government.
For starters, five months ago, the Federal Reserve started a bond-buying program again, something it did during the financial crisis. Since launching the program, the reserve has purchased about $892 billion of agency mortgage-backed securities, pushing mortgage rates to an all-time low.
These low rates continue to fuel refinance demand, as the Mortgage Bankers Association’s refinance index continues to increase year over year, with last week marking the thirteenth-straight week of year-over-year gains.
Then, there’s the CARES Act, which Congress passed in March to offer economic relief to those affected by the shut-downs, expanding unemployment benefits and offering mortgage forbearance to homeowners with mortgages backed or insured by the federal government, including Freddie Mac, Fannie Mae, VA and FHA. Under the CARES Act, homeowners can ask for forbearance from their mortgage servicer and suspend payments for up to 12 months.
The CARES Act
Over the past five months, McLaughlin said his forecast has shifted considerably.
Back in early April, he wasn’t forecasting any impact from COVID on home prices, and predicted a growth in home prices, although at a slower rate.
“Now, we do show a decent likelihood of price declines in early 2021,” he said. “The major reason why we are forecasting price declines isn’t necessarily because the course of the pandemic has worsened from where we initially thought it was going to go, but really because of policy questions.”
With the introduction of the CARES Act, homeowners were given protection not only from forbearance and eviction, but also households were given extra unemployment insurance.
McLaughlin said now the big question is going to be: “For all those households that took forbearance, what’s going to happen when the 12-month period runs out?”
“Ideally, in a perfect policy world, you’d be able to extend the forbearance program long enough so that the rising tide of the U.S. economy would take over and would basically re-employ those homeowners who have lost their jobs,” he said.
But with no extended forbearance policy on the horizon, McLaughlin shared his new updates on the future of the housing market.
The future of housing
If there are no new forbearance programs put in place to protect households who were impacted by the coronavirus, McLaughlin said there is a non-trivial likelihood that there will be an increase in foreclosure proceedings and an increase in distressed inventory in March, April and May of 2021.
According to the latest data from Black Knight, there were 2.25 million home loans that were seriously delinquent last month, reaching the highest level since early 2010.
This lack of certainty around a new forbearance program caused McLaughlin to adjust his forecast to add in the probability of an increase in foreclosures and distressed inventory, leading to a period of home price declines.
But home shoppers waiting around for Great-Recession level price drops are going to be severely disappointed. The Great Recession produced 10% to 20% price declines on a year-over-year basis. Now, McLaughlin’s latest forecast from Haus states that home prices are expected to grow between 0.9% and 1.7% in August but are expected to fall early next year by -0.5% to -2.5% on a year-over-year basis.
The interactive chart below shows Haus’s regional forecasts for each of its 400 forecast markets, with some markets, like Colorado Springs, bucking the trend and still expecting to experience an increase year over year.
One of the biggest differences between the Great Recessions and today is inventory levels.
“Homeowners weren’t impacted as broadly as say during the Great Recession, so there wasn’t this flood of inventory. In fact, exactly the opposite happened. Over the course of this pandemic, we’ve gone from what was historically low inventory pre-pandemic to low inventory that I don’t think anyone ever could have foreseen even six months ago,” he said.
Unsold inventory sits at a 3.1-month supply at the current sales pace, according to the most recent numbers from the National Association of Realtors. Lawrence Yun, NAR’s chief economist, said, “The number of new listings is increasing, but they are quickly taken out of the market from heavy buyer competition. More homes need to be built.”
There is a possible silver lining for would-be buyers though, as McLaughlin added that there are a few factors that could change early next year, creating the possibility of a buyer’s market. The two main drivers behind this shift – distressed inventory coming to the market and would-be sellers that chose to hold off until 2021.
“If that leads to a big increase in supply that far outpaces the growing demand that we have from the demographic structure, that could lead to potentially another shift towards a buyers market, maybe not to the extent that we saw back in 2009, 2010 and 2011, but certainly maybe a shift to a buyer’s market that we haven’t seen this cycle,” he said.
Then, there’s the uncertainty around the issue that we’re all hyper-focused on: the virus. As everyone watches and waits for clarity on housing policy, the potential for a large amount of distressed inventory and a cure for the virus, the word uncertainty in a housing forecast is starting to be the most certain thing the industry can rely on.