Will US housing market crash and burn if coronavirus continues to ravage the economy at this pace?
The coronavirus pandemic has wreaked havoc across the globe and butchered the economy, to the point that the economic downfall is starting to resemble the Great Depression. It has upended lives and caused mass unemployment with many businesses filing for bankruptcy. More than twice the amount of Americans lost their jobs in April than in two years of the Great Depression in the late 1920s.
Nearly a third of the apartment tenants didn't pay their rent in the first week of April, as per Barron's. Consumer spending during March plummeted by 7.5%, the largest monthly decline since the government began monitoring it in 1959. And as it seems, the real estate industry will not escape the crisis unscathed either.
The US housing market basically went on a timeout when the World Health Organization declared coronavirus a global pandemic. At least 20M people have lost their jobs and nearly 300M have been asked to stay home. Normally, economic recessions have minor effects on the housing markets but the coronavirus pandemic has redefined that for us.
With the country going into lockdown as a preventive measure, the real estate market is struggling amid two extremes threatening a crash. As people are homebound and working remotely, which may possibly be the nation's new reality, it may cause them to scour through new listings for larger homes with more amenities. On the other hand, with the economic decline, many workers face unemployment or uncertainty over their next paycheck, which means lesser or no demand for houses, especially during the pandemic.
Furthermore, the rental market is also bearing the brunt of the pandemic's economic ramifications. Many states have imposed moratoriums on eviction until July, which has allowed all tenants to delay rent payment without penalty, putting landlords in a difficult position. Millions of landlords in the US owe lenders more than $1 trillion combined, and with the tenants failing to pay monthly rent, this has only put them behind a couple of millions in the mortgage payment.
In order to control the damage that this could cause, the government has stepped forward to help landlords and homeowners in a way that it has never done before during the previous economic recession a decade ago. The Cares Act gives them the right to defer on their mortgage payments for up to 180 days, and also an option to extend that by an additional 180 days.
Real estate site Zillow conducted a comparative study of pandemics in the past and concluded with inferences that home prices had remained pretty much constant or decreased by a small amount, although sales had dramatically dropped during an outbreak. This only adds to the truth that it is difficult for a change in price when the transactions are reduced. In a nutshell, that means the previous pandemics had simply halted the real estate market. The data also gives insight into how this is unraveling in the US.
Prior to the pandemic, the housing market was in a tight situation. For example in Seattle, the price ranges have increased drastically as it is the country's technology hub. When the nation as a whole is pushing through housing shortages, Seattle's vacant home sales dropped by 27.6 percent year over year in January, per Brookings. Other cities are also in a similar predicament if not worse, with supply at an approximate record low and demand at an approximate all-time high, across the country. The combination of the two points at home prices being near all-time highs in most US cities while many potential buyers bid on a short supply of listed and available homes.
Low unemployment, a definite growth in wage and low mortgage rates are all signs of high demands. Since the onset of the pandemic, however, unemployment rates have surged and companies have cut down on pay. Web traffic on real estate sites like Zillow and Redfin declined by almost 40 percent following the pandemic. New listings for selling homes fell by about 70 percent in markets like New York and East Bay, California, and weekly mortgage applications declined by 17.9 percent in the first week of April. The effects differ in each city, depending on the local conditions.
During the 2008 financial crisis, both real estate and stock markets plummeted in tandem even though the two aren't tied to each other in a way, because technically people don't usually buy houses as an investment. People usually make a new real estate purchase when they go through a major life-changing experience like relocating for work, marriage, children or downsizing for retirement. So even during a state of recession, the housing market is pretty robust and prices have even increased in some situations. But with the slowdown in housing markets, those life changes may have to be postponed, just like it did for millions of people during the Great Depression.
Furthermore, home sales also generate derivative economic activity through other channels. Local governments, for instance, depend on deed transfer taxes as revenue to support public services like schools and public safety. When sales don't go through, real estate agents, home inspectors and other intermediaries don't get their share of the revenue. Even moving companies, furniture and appliance stores, landscapers and construction companies incur revenue losses in this sense. With the pandemic raging on, there's no way to predict the time it will take for the market to recover. However, the data that has been collected so far clearly illustrates that the housing market will definitely be shaken by the pandemic.