Will The Housing Market Crash Again?
For the last few months, everyone's held their breath as two apocalyptic events have played out: a deadly pandemic and the resulting economic meltdown. While life has slowly adapted around social distancing restrictions, the ground still feels shaky underneath everyone's feet. Everyone's worried about another recession, and the 2008 housing crisis is fresh on everyone's mind.
So it's natural that everyone involved in the housing market – buyer, seller, investor, or professional – is nervous that real estate is bound to collapse. It's hard to know anything for certain. Contagion – whether it's a virus or economic fear – can be hard to predict. However, there are good reasons to believe that home values will remain stable. As coronavirus shutdowns accelerate the pre-existing risk of an oncoming recession, the 2008 housing market crisis is fresh on everyone's mind.
Will COVID-19 Cause a Repeat of the 2008 Housing Market Crash?
It's natural for people to ask this question. The 2008 housing market crash is the most recent economic disaster in memory, and one many Americans are still recovering from. However, the answer to this question is actually fairly straightforward: no. In part because it's the wrong question. The 2008 financial crisis was a very particular beast, and the circumstances that caused it are very different from the ones we're facing today. Back then, risky lending practices created a housing bubble that was destined to pop.
First and foremost, the bubble was inflated to produce higher investment returns, so when it burst, the housing and stock markets plummeted together. But that isn't the norm. The stock market and housing markets usually influence one another, but not so directly and almost never in sync. If anything, the relationship is often inverse; people turn to real estate investments when the stock market becomes volatile. Post-2008 regulations have made problematic lending practices that caused the crash much rarer. So no, this pandemic can't recreate the 2008 real estate market bust. But could coronavirus cause a crash of its own?
How Do Pandemics Affect the Real Estate Market?
A pandemic is a very particular beast, as well. Human behavior and public policy aren't drivers now, but copilots. Instead, the speed and direction of our economy are being chosen by viral mutation and disease transmission. Zillow recently published a literature review of how previous pandemics impacted economies in general and housing markets specifically. Gross Domestic Product (GDP) findings from studies on a number of flu pandemics, as well as SARS, showed between 1% and 6% loss of annualized GDP.
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The general economic trend seems to be a fast return to the previous trendline once the pandemic is over, with slower unemployment recovery. Due to a lack of information from other studies, the data we have for the response of the housing market alone is based on the 2003 SARS outbreak in Hong Kong. In that instance, there were huge fluctuations in the number of real estate transactions, but real estate prices mostly held steady. And that's a pattern echoed by what we're seeing now. That could be great news.
Will the Housing Market Bounce Back from COVID-19 like Previous Pandemics?
Even though the current indicators match up so far with Hong Kong's experience, it's worth noting the ways in which the SARS outbreak differs from what is happening now. SARS came to Hong Kong in February 2003, peaked in March and April, and vanished for good by the close of June. While many countries have tackled COVID-19 on a similar timeline, the U.S. appears to be in for a more protracted battle. COVID also arrived here in February, but June is in our rearview and, after a dip, new case rates are higher than they've ever been.
It's not just the length of economic duress that's different. It's also the severity. In Hong Kong in 2003, unemployment rose 1.3% as SARS ran its course, climbing from 7.4% to 8.7%. It fell to pre-pandemic levels by the end of the year. In the U.S., the official unemployment rate spiked an incredible 11.2% from February to April. And as many have pointed out, the preliminary April figure of 14.7% may have marked a record high, but it probably lowballs reality. The real figure may have been 20% or higher. It's trending down a bit, but with a new wave of corona and the accompanying business shutdowns, it may stagnate or even rise again.
If Coronavirus Causes a Recession, How Does that Impact Housing Markets?
Economists were flirting with the "R-word" before COVID-19 was a twinkle in anyone's eye. The pandemic brought layoffs and pay cuts that many hoped would be temporary but are looking more and more permanent. The good news is that housing markets tend to stay steady during a recession. The 2008 financial crisis conflated economic downturns and housing crises in our collective minds, but they don't always go hand in hand. In fact, when you disregard the aberrant 2008 bubble, home prices increased in 3 of the 4 other modern recessions. Demand has outpaced housing supply for several years, which will probably keep home prices from falling even during an economic slowdown. And although it's hard to label this "good news," many of the newly unemployed are low-wage workers who weren't in a position to buy a house even before coronavirus.
Will the COVID-19 Mortgage Freeze Hurt the Housing Market?
There's one more important piece in this puzzle. After the lockdown began in March, the Federal Housing Administration (FHA) placed a moratorium on foreclosures to keep home prices from entering free fall as they did in 2008. This is great for homeowners whose income was affected, and it bought time for the market as a whole. But while the FHA stopped the clock for mortgage payments, that didn't protect everyone else up the chain. Loan servicers are still expected to pay investors in mortgage bonds, even as income from borrowers shrinks.
Lenders could pull from capital reserves to pay investors, but not for long. Lenders and servicers could potentially fold, which would worsen the crisis. Even if the infrastructure of mortgage servicing remains intact, without borrower payments, new loans could become impossible. Mortgage bonds play a role in pensions and other investment funds. If they lose value, we'll have even bigger problems. The likelihood of this nightmare scenario has faded due to the Federal Reserve buying up mortgage-backed securities.
Want to Learn More?
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