Why Hasn’t COVID Killed the Housing Market?

2020 has undoubtedly been a hard year for everyone. Very few businesses are thriving, and the economy as a whole has been struggling. More people lost jobs this year then during the 2008 recession. So why hasn’t the housing market gone down? 

Supply & Demand

Since the recession in 2008, developers have been scared away from building too much. Between 2012-2020, not a lot of inventory has been added to the housing market – causing a severe drop in supply. 

In 2006, there were 4 million homes available to be sold. This is a stark contrast to the 1.5 million homes available this year. This continued reduction in supply has helped to keep prices stable during a time of economic uncertainty, as the supply/demand balance has remained steady.

Low Mortgage Rates

When the federal funds rate dropped to almost 0% earlier this year, the 30-year mortgage rate fell to about 3%. This caused a spike in demand for housing, as many homebuyers sought to take advantage of low interest rates. Homeownership levels reached a near-historic high of 67%, just shy of the all-time high of 69%. This increased demand combined with continued low supply levels kept prices up even though the economy suffered.

Recession Impacted Renters, Not Owners

The pandemic recession has unequally affected low-wage, young, and minority workers. This has had a high impact on the rental community, but not so much on the homeowner community. 

High-income families (who are more likely to buy or own homes) did see a dip in employment during COVID, but this has quickly corrected itself. On the flip side, low-income families (who are more likely to rent) saw a drastic dip in unemployment, which has yet to recover. This has caused rental prices to go down across the nation – while house prices stay steady or continue to rise.

Stock Market Rebound

The stock market took a major dip of about 8,000 points early this Spring. However, it has nearly entirely recovered since then. While at first the crash did cause panic for many, the quick recovery has prevented people from needing to short sale their homes. 

Stimulus Package 

The stimulus package earlier this year offered tremendous support to the housing market by buying out a substantial quantity of mortgage-backed securities. At a time when banks and mortgage companies had justifiable concern that a lack of payments would crash the market, this stimulus helped to prevent housing prices from falling dramatically.

All of these realities have drastically set this recession apart from the 2008 recession which crumbled the housing market. It should be noted that not every recession mandates a housing crash. In the 35 major recessions we have lived through as a nation, the 2008 recession was the only one so closely tied to housing, setting it apart as a rarity. That being said, there are a few things which could still cause home prices to plummet.

Forbearance’s Run Out

Part of the CARES Act passed earlier this year included forbearances for homeowners. At some point, Congress will have to stop extending these forbearances. By October, about 7% of all home mortgages were in forbearance – meaning about 3.4 million homeowners were not paying the principal on their mortgage. 

When this forbearance ends, many of these homes may enter the foreclosure or short-sale market, which could drive supply up and therefore reduce prices. In addition, we may see rental, vacation, and Airbnb properties add to the foreclosure or short sale market – further increasing supply.

Rental Market Crashes

While the housing market has remained steady, the rental market has indeed dipped. If rental prices stay lower than the average mortgage payments, potential homeowners may flock to renting to save money – causing an oversupply of housing inventory.

Re-Listings

Many people took their homes off the market as the pandemic worsened this spring. According to Housing Wire, almost 30,000 homes were pulled off the market during the last week of March. This is about double the usual quantity of homes coming off the market. It’s possible that, as the pandemic lessens, we may see a sudden influx of listings as people become more comfortable. This could also drive supply up and bring prices down.

Too Much Demand

Although many economists are concerned about too much supply – too much demand can also be harmful. If the demand increases to the point where there are not enough affordable homes left in the market, new demand could drop off, level off, or even crash home prices.

It seems the combination of stimulus, low mortgage rates, economic rebound, and limited supply have kept the housing market in check during the 2020 recession. While there are some factors that could cause prices to go down again, it is more likely that prices will continue to rise. 

Leave a Reply