Here Are Three Ways Coronavirus Could Affect the U.S. Housing Market

Highlights from this report:

  • We are already witnessing economic effects of the Coronavirus (COVID-19).
  • The coronavirus could begin to affect the U.S. housing market, as well.
  • We could see fewer home sales and slower price growth in the months ahead.
  • One upside: mortgage rates could drop, due to Federal Reserve policy changes.

How Coronavirus Could Affect the Housing Market in 2020

The U.S. housing market is connected to the broader economy in many ways. For instance, when stock markets tumble due to investor anxiety, consumer spending tends to decline along with it. People get nervous about spending large sums of money, such as those required to make a home purchase.

Right now, the nation’s real estate markets haven’t seen much of an impact from the coronavirus. People are still buying homes, and house values are still climbing in most U.S. cities.

But that could very well change in the coming months, as the virus continues to spread and cause concern.

Let’s be clear: No one can predict the future with complete accuracy. And there’s no reason to panic. (Nothing brings the economy to a halt like unnecessary and irrational fears.) With that being said, we can make an educated guess about what might happen, by using history as a guide.

So, here are three ways the coronavirus could affect the housing market in 2020:

1. Mortgage rates could drop.

Could mortgage rates in the U.S. drop, as an indirect result of the coronavirus outbreak? It’s possible.

Update: Three days after we published this story, mortgage rates fell to their lowest point in nearly 50 years. Here’s more on that development. So this prediction was right on target.

In fact, the Federal Reserve announced today that it was cutting the federal funds rate starting on March 4. The central bank made the move out of concerns that the U.S. economy would slow down due to the outbreak.

In a statement released earlier today, Fed officials stated:

” … the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent.”

The federal funds rate, in the above context, is the one used by banks when they transfer money among themselves. It does not apply to mortgage loans. But they too could go down in the coming weeks.

While Fed policies do not directly control mortgage rates, they can have an indirect influence. Generally speaking, when the Fed raises or lowers the aforementioned “funds rate,” borrowing costs tend to rise or fall along with them. So we could see mortgage interest rates go down in the weeks ahead.

That’s one way the coronavirus could affect the U.S. housing market. It might make it cheaper for home buyers to get a home loan.

2. It could reduce buyer demand and home sales.

Housing market strength and activity tends to go hand-in-hand with the broader economy. When the nation enters an economic slowdown or recession, the real estate market tends to slow down along with it.

The main reason is somewhat obvious: People are less likely to buy a home — or other major purchases — when they’re concerned about the future from an economic standpoint.

We saw this about twelve years ago, when the U.S. economy was sputtering through the Great Recession. Home sales plummeted nationwide in most U.S. cities, as buyers shied away from the market due to uncertainty.

It’s too soon to say if the coronavirus will affect the housing market in this way. In fact, home sales in the U.S. actually surged in January 2020, hitting a 12-year high. But that was when concerns over the virus were much lower among Americans, since it was limited to China at the time.

Today, the virus is popping up in cities and communities all across the United States. It’s not just happening “over there.” It’s happening here too, and on every continent except for Antarctica.

Home sales figures are typically reported with a one- or two-month lag. So we won’t see any direct effects of the coronavirus on housing sales for another month or two. If I had to make a prediction, I’d say we might see a gradual decline in home sales over the coming months.

Related: Housing crash unlikely at this stage

3. Home prices could drop in some cities, particularly in higher-priced markets.

The coronavirus could also affect the U.S. housing market by slowing home-price growth. This would be an offshoot of the buyer withdrawal scenario mentioned above.

If home-buying activity declines on the heels of an economic slowdown, it would remove some of the upward pressure on prices. In that case, we could see home values begin to level off in many U.S. cities (following a years-long upward trend).

In some local housing markets, prices could actually decline over the coming months. The price-drop scenario is most likely in higher-priced real estate markets where affordability is lacking (i.e., places where the average resident can scarcely afford to buy).

But here again, it hasn’t happened yet. It’s a possible scenario, based on current trends. But it’s still speculative at this stage. The truth of the matter, for now, is that home prices are still rising in most U.S. cities.

We got more evidence of this earlier today. According to a March 3rd report from the property data company CoreLogic, home prices in the U.S. rose 4% from January 2019 to January 2020. Looking forward, the company has predicted that U.S. house values could continue to climb.

“January marked the third consecutive month that annual home price growth accelerated in our national index, as low mortgage rates and rising income supported home sales,” said Dr. Frank Nothaft, chief economist at CoreLogic.

The company’s “HPI Forecast” predicts that prices nationwide will rise by 5.4% from January 2020 to January 2021.

But their analysis is based on current conditions within the U.S. housing market and broader economy. And those conditions could change as new developments emerge on the coronavirus front.

So there you have them — three ways the coronavirus could affect the U.S. real estate market in 2020 and beyond. In closing, here’s another possible scenario. You might like this one better.

An Alternate View: Steady as She Goes

The majority of people who get the coronavirus experience only mild symptoms, which are similar to those associated with the common flu. Sure, we all need to take some extra precautions to combat the spread of the illness. But there’s no need for panic. That does no one any good.

With that in mind, it’s possible that we could see only a minor and temporary slowdown in housing market activity as a result of the coronavirus.

Much depends on how people react to the virus, and how it influences their general outlook. In other words, the coronavirus itself cannot harm or slow the real estate market — only people can do that.

Here’s another bright note to end on: Israeli researchers believe they are weeks away from a functional vaccine for the coronavirus. I think we can all be rooting for them, at this point.

Be smart. Be kind. Wash your hands. We’ll get through this.

Disclaimer: This article contains forecasts and predictions relating to the housing market and economy. Those forward-looking views are the equivalent of an educated guess and should be treated as such. The Home Buying Institute makes no claims or assertions about future housing conditions.