Is the housing market facing its greatest challenge in over a decade? Yes, however, there are five factors significantly different about today’s market than the last recession. Not to mention interest rates This Week in Real Estate fell to within three (3) basis points of setting a new all-time low and the Fed has purchased mortgage-backed securities at an unprecedented scale. Below are a few newsworthy events from the second week of April that influence our business:
Think This is a Housing Crisis? Think Again. Today, we face a very different challenge: an external health crisis that has caused a pause in much of the economy and a major shutdown of many parts of the country. Let’s look at five things we know about today’s housing market that were different in 2008. First, appreciation: there’s a big difference between the 6 years prior to the housing crash and the most recent 6-year period of time. Leading up to the crash, we had much higher appreciation in this country than we see today. In fact, the highest level of appreciation most recently is below the lowest level we saw leading up to the crash. Prices have been rising lately, but not at the rate they were climbing back when we had runaway appreciation. Second, mortgage credit: the Mortgage Credit Availability Index is a monthly measure by the Mortgage Bankers Association that gauges the level of difficulty to secure a loan. The higher the index, the easier it is to get a loan; the lower the index, the harder. Today we’re nowhere near the levels seen before the housing crash when it was very easy to get approved for a mortgage. After the crash, however, lending standards tightened and have remained that way leading up to today.
Third, number of homes for sale: one of the causes of the housing crash in 2008 was an oversupply of homes for sale. Today, as shown in the next image, we see a much different picture. We don’t have enough homes on the market for the number of people who want to buy them. Across the country, we have less than 6 months of inventory, an undersupply of homes available for interested buyers. Fourth, use of home equity: in 2008, consumers were harvesting equity from their homes (through cash-out refinances) and using it to finance their lifestyles. Today, consumers are treating the equity in their homes much more cautiously. Fifth, home equity: today, 53.8% of homes across the country have at least 50% equity. In 2008, homeowners walked away when they owed more than what their homes were worth. With the equity homeowners have now, they’re much less likely to walk away from their homes. The bottom line is the COVID-19 crisis is causing different challenges across the country than the ones we faced in 2008. Back then, we had a housing crisis; today, we face a health crisis. What we know now is that housing is in a much stronger position today than it was in 2008. It is no longer the center of the economic slowdown. Rather, it could be just what helps pull us out of the downturn.
Freddie Cautiously Optimistic as Housing Market Shows Resilience. Freddie Mac’s Quarterly Forecast is more upbeat than one might expect. While it acknowledges that, with big chunks of the U.S. economy currently in lockdown the housing market faces “its greatest challenge in over a decade,” it seems to assume its duration could perhaps be limited, with the recovery starting in the third quarter of the year. Freddie Mac’s Economic and Housing Research Group says that due to the stay-at-home orders in effect in more than half of the states, housing markets will not have their typical spring sales surge. They will probably fall 45 percent on a seasonally adjusted annual basis in the second quarter. House prices, however, will be insulated to some extent by the fiscal stimulus and extended unemployment insurance coverage provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The forbearance and foreclosure mitigation programs put into effect by lenders and reinforced by the CARES Act will limit the fire-sale conditions that emerged during the Great Recession. Freddie Mac expects home prices to decline by 0.5 percentage point over the next four quarters. Also preventing a price collapse is the persistent lack of available homes for sale. In addition, population growth and pent up household formations will provide a “tailwind” to housing demand. When the recovery begins, the company forecasts that price growth will accelerate back to a long-term increases between 2 and 3 percent a year.
Average Mortgage Rate is 3 Basis Points From All-Time Low. The average U.S. rate for a 30-year fixed mortgage fell to 3.31% this week, putting it three basis points away from setting a new all-time low. It was down from 3.33% in the prior two weeks, Freddie Mac said on Thursday. The weekly average is falling after spiking to 3.65% in mid-March, when the COVID-19 pandemic began hitting the U.S. in force. In the last week of March, the Federal Reserve said it would buy “unlimited” amounts of mortgage-backed securities to keep credit flowing. The Fed has purchased about $1.6 trillion of mortgage-backed securities in the last four weeks, according to Lorie Logan, an executive vice president at the Federal Reserve Bank of New York, which carries out market operations for the central bank. “The scale of these purchases has been unparalleled,” surpassing even the Fed’s intervention following the collapse of the banking system in 2008, Logan said in a speech on Tuesday. For the year, the average rate for a 30-year fixed mortgage probably will be 3.3 percent in 2020 and 3.1 percent in 2021 as the economy struggles to get on firm footing, Freddie Mac said in a forecast on Monday.