Like just about everything else during the global COVID-19 pandemic, the U.S. housing industry is on lockdown. New-construction sales centers are empty. In most states, real estate agents can’t show houses. Inspectors won’t inspect. Appraisers can’t appraise. Even cash buyers willing to waive contingencies can’t get an appointment with Realtors. Closings for homes that went under contract before America put its economy on ice—if they happen at all—are now done via video-conferencing apps and title companies’ drive-through windows in order to comply with stay-at-home orders and social-distancing guidelines.
Before the pandemic, the U.S. housing market was on relatively solid footing. While the number of homes for sale remained low, constraining sales activity to an extent, demand among buyers was still quite high. Realtor.com found low mortgage rates had fueled an early start to the spring home-buying season, with homes selling four days faster in the first quarter of 2020 when compared with 2019 levels.
With every transaction, real estate in America touches 13 jobs; it represents approximately 5% of GDP.
Housing is emotional, a big-ticket game inextricably linked to macro-level downwind pressures on employment, wages, job mobility, the stock market, and, ultimately, consumer confidence. Most Realtors in the country can agree right now on one thing: the industry’s “non-essential” status in many states and cities is crushing the market at a time when the spring selling season should be opening the floodgates. Like everything else, the housing market will not go unscathed. Consumer confidence and a strong labor market are essential in the decision to purchase a home. In the 2008-10 Great Recession, a housing mortgage bubble was the cause of the economic crisis. This time, housing is a casualty in a global public health crisis turned economic train wreck.
The Numbers
Home list prices were up only 3.3% year-over-year for the week ending March 21, 2020, and 2.5% for the following week. This represented the slowest pace of listing-price growth since Realtor.com started tracking this data in 2013.
U.S. home-building activity collapsed in March 2020, with housing starts declining 22.3% from the previous month. This is the worst monthly decline since March 1984, when new-home construction activity declined by 26.4%.
Regionally, the Northeast experienced the most pronounced decrease in overall new-home construction with a 42.5% decline in March, almost double the slide seen in the South, West, and Midwest. The Midwest noted the largest drop in single-family starts. These numbers are likely indicative of what can be expected in terms of housing data in future months as the COVID-19 slowdown in economic activity hits harder. (Note that the pandemic’s impact only really started to be felt in the latter half of March.)
Sales of existing homes fell a wider-than-expected 8.5% in March compared with February to an annualized pace of 5.27 million units, according to the National Association of Realtors’ (NAR) seasonally adjusted index. These sales figures are based on closings that represent contracts signed mostly in late January and February before the coronavirus shut down so much of the economy. Lawrence Yun, the chief economist at the NAR has indicated that sales could fall as much as 30-40% in the coming months.
Signs of Worry
The National Association of Home Builders’ Housing Market Index (HMI) is a gauge of builder opinion on the relative level of current and future single-family home sales. The data is compiled from a survey of around 900 homebuilders; 501 builders answered the survey out in April 2020 vs. just 300 in April 2019. The HMI is a diffusion index, which means that a reading above 50 indicates a favorable outlook on home sales; below 50 indicates a negative outlook.
The HMI tumbled to 30 in April 2020, the largest monthly drop on record, the lowest reading since June 2012 and well below the pre-pandemic forecasts of 55. The current single-family sub-index declined to 36 from 79 in March, the sub-index for home sales for the next six months dropped to 36 from 75, and prospective buyers also went down to 13 from 56.
The University of Michigan’s preliminary consumer sentiment index for April showed that consumers’ plans to buy a home have tumbled the farthest, in the worst decline since 1979. Other recent reports have shown additional signs of a slowdown in the housing market. LendingTree released an analysis of Google search data analyzing the popularity of the search term “homes for sale” across the country’s 50 largest metro areas. Searches for “homes for sale” have fallen across all 50 cities in the study from their 2020 peak levels thus far. LendingTree estimated that these Google searches could drop 63% compared with last year if the impact of the pandemic remains substantial for the next two months. Such a fade in web searches could presage a decline in home sales.
Mortgage applications provide another sign that home sales will slump this spring, despite mortgage rates being near historic lows. The volume of mortgage applications for loans used to purchase homes was down 24% compared with 2019 for the week ending March 27, 2020, according to data from the Mortgage Bankers Association. Comparatively, the volume of refinance applications was 168% higher in March 2020 than in 2019.
Lending Criteria Tightens Up
Making matters worse is the tightening of eligibility requirements that lenders are putting in place for mortgages. The latest Mortgage Credit Availability Index shows lenders are tightening their standards amid the coronavirus pandemic. As of April 2020, overall mortgage availability is 16% lower than it was in February 2020 and at its lowest point since June 2015. The availability of conventional loans dropped 24.2% in March 2020, while jumbo loan availability dipped 36.9%. Government loans, which include USDA, VA, and FHA mortgages, fell 6.6%.
Signs that lending standards were changing started to be seen in late March 2020 with a crash in demand for those jumbo loan mortgages, which are those over the $510,400 conforming loan ceiling. Quicken announced that it is no longer making jumbo loans and Wells Fargo & Co. recently announced that it was halting the purchase of jumbo mortgages that originate from other lenders. Investors are sticking with government-backed loans, which have greater security given payments will still be received even if borrowers have been granted forbearance. In the last downturn, it took almost five years to close the premium charged to attain a jumbo mortgage over rates on conforming mortgages. Further, the lending environment began to shift with many lenders raising their FHA requirements, thereby limiting the number of borrowers that were able to get an FHA mortgage.
As of April 14, 2020, JPMorgan Chase customers applying for a new mortgage will need a credit score of at least 700 and will be required to make a down payment equal to 20% of the home’s value. JPMorgan was the fourth-largest U.S. mortgage lender in 2019. JPMorgan would not disclose the current minimum requirements for its various mortgage products, but the average down payment across the housing market is around 10%. The changes should help JPMorgan reduce its exposure to borrowers who unexpectedly lose their job, suffer a decline in wages, or whose homes lose value.
The change highlights how banks are quickly shifting gears to respond to the U.S. economic outlook and stress in the housing market after measures to contain the virus put 16 million people out of work. The residential mortgage market is already under strain after borrower requests to delay mortgage payments rose 1,900% in the second half of March 2020. The U.S. housing market had been on a steady footing earlier in 2020, but with a deepening recession and with would-be homebuyers unable to view properties or close purchases due to social distancing measures, the health crisis now threatens to derail the sector.
The Shape of Things to Come
Uncertainty is now housing’s greatest future risk. No one knows yet how persistent the COVID-19 virus will be, how long America’s economy will remain locked down, or what the lasting social and emotional toll will be on how we live, work, and interact with one another in the future.
While the broad consensus has been that the residential housing market will quickly reset, it’s more likely that real estate, like everything else, will fundamentally never be quite the same again. Economic crises have long-lasting effects on people’s psyches and decision-making as well as their pocketbooks. COVID-19’s long-term re-ordering will take months, if not years, to shake out. What the new normal looks like is anyone’s guess.
The post-pandemic real estate market will almost certainly have unexpected upstream effects as well, including how architects envision the new definition of home after months of people sheltering in place. This may take the form of more touchless technology in high-rise buildings, an increased use of remotely accessible technology such as locks and thermostats, and designs built for online working from home.