The U.S. Housing Market Will Slow in 2020, But Not Like in 2008

Key highlights from this report:

  • We are already seeing signs of a housing market slowdown across the U.S.
  • Some buyers and seller alike are taking a wait-and-see approach.
  • Sales have declined, and many sellers are pulling their homes off market.
  • We expect the U.S. housing market to slow even further through spring 2020.
  • But it probably won’t be like the real estate market crash of 2008.

U.S. Housing Market Continues to Slow in Early Spring

Earlier this year, low mortgage rates and strong employment numbers were giving the U.S. housing market a strong boost. The National Association of REALTORS (NAR) reported a 6.5% increase in existing-home sales in February 2020, which was a 13-year high.

“February’s pending sales figures show the housing market had been very healthy prior to the coronavirus-induced shutdown,” said Lawrence Yun, chief economist for the NAR. 

But that was then, and this is now.

Home sales have declined since then, and they will probably continue to do so as the broader housing market slows down due to the coronavirus pandemic.

The NAR’s research team estimated we could see a 10% reduction in nationwide home sales for 2020 (compared to last year). But that number could be even higher if unemployment figures continue to climb. A lot depends on how long the public health crisis drags on, and how long the economy stays in “pause” mode.

U.S. Home Sales Hit with ‘Double Whammy’

There are two main factors that could cause home sales to decline across the United States:

  • On the supply side, a lot of sellers are taking their homes off market due to contamination concerns, and also due to a lack of buyer activity.
  • On the demand side, many buyers have shied away from the housing market due to job loss, uncertainty, and/or contamination concerns.

These ongoing trends will cause the U.S. housing market to slow further as we move through spring and into the summer of 2020. We could also see an increase in the number of price reductions, as desperate sellers struggle to attract buyers. But these are temporary conditions.

Of course, real estate conditions can vary quite a bit from one region to another. Some housing markets, including many in Texas, could weather the storm better than others.

How This Time Is Different from 2008

The U.S. housing market came to a screeching halt back in 2008. That’s partly what led the nation into the Great Recession. But things were much different back then. While the housing market is starting to slow down again, there are different factors at play today.

Back in the mid-2000s, the U.S. housing market was largely overvalued and overbuilt. Rampant speculation led to a real estate construction boom. Meanwhile, mortgage lenders were issuing loans to high-risk borrowers who wouldn’t qualify under today’s more stringent guidelines.

In 2008, there was a surplus of inventory nationwide. Builders were building new homes at a breakneck pace, trying to capitalize on a surge in demand. But in 2020, we don’t have those same “ingredients” in place. So whatever housing market slowdown we see this time around might not be as severe, or as lengthy, as the one that started in 2008.

In notes issued earlier this month, analysts from Goldman Sachs said they “do not currently expect the strain on housing to be of a similar magnitude seen in the last downturn.”

There are some key differences that could give today’s housing market a bit of shielding in the months ahead. As the Goldman Sachs researchers pointed out, the real estate sector is entering these tough economic times in better overall shape than in the last downturn.

Another key difference has to do with foreclosures and foreclosure risk. During the last housing market crash, the U.S. experienced a sharp rise in the number of home foreclosures. Today’s lending standards are more strict than they were during the last housing boom. As a result, foreclosure and default risk levels are much lower today than in the past.

Purchase Loan Volume Continues to Decline

For more evidence that the U.S. housing market is slowing down, we can look at mortgage application volume.

According to a recent report from the Mortgage Bankers Association (MBA), applications for home-purchase loans declined by 35% during the week ending on April 10, 2020 compared to a year earlier.

Mortgage refinancing, on the other hand, has seen a surge of activity as homeowners rush to take advantage of low mortgage rates. During that same week, the MBA’s refinance index “increased 10 percent from the previous week and was 192 percent higher than the same week one year ago.”

The purchase loan index is a better indicator of what’s happening in the housing market, because it reflects applications submitted by home buyers. And it clearly shows that the U.S. real estate sector is slowing down as the coronavirus crisis drags on.

Some See the Market Rebounding in Second Half of 2020

According to Joel Kan, head of forecasting for the MBA, the “purchase market is still expected to rebound, as long as the public health measures to reduce the pandemic’s spread are successful and result in a broader recovery.”

In a report issued on April 13, Freddie Mac’s chief economist Sam Khater said they expect to see a recovery beginning in the second half of 2020. He added that “it will take some time for the economy to fully bounce back.”

So, will the U.S. housing market slow down further in 2020? The general consensus is yes. Home sales and price growth are both expected to decline in the coming months. But many analysts appear optimistic that we could enter a rebound period during the second half of the year.

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