It may be hard to admit, but the Coronavirus pandemic is going to have a harsh effect on the economy. The Federal Reserve is predicting a 6.5% dip in real gross domestic product for the remainder of 2020, with the unemployment rate expecting to reach 9.3% by the end of the year.
Under normal circumstances, this would result in terrible consequences for the housing market. And yet, the opposite effect is starting to take place. Due to a variety of reasons, the number of homes currently on the market is continuing to fall while the prices of these homes seem to be accelerating. This has come as a relief to many homeowners as the value of their homes remains intact.
However, this news comes as another hardship for the millennial generation as they struggle to afford homes.
The primary factor contributing to this growth in home prices can be attributed to supply and demand. The disruption that the pandemic has created for the supply is lasting longer than the disruption that has been created for the demand.
Last week’s figures showed a rise in purchase applications for the 8th week in a row. The decline in mortgage interest rates has helped this quick rebound take place. Especially since these rates are not expected to rise anytime soon.
But if the housing market’s history has taught us anything, it’s that demand responds at a much quicker rate than supply. In both March & April, we saw a massive drop in single-family housing starts, with recent reports displaying a 25% year-to-year fall. This can be attributed to many states shutting down construction due to the pandemic. And when construction was allowed to continue, it happened at a much slower rate.
Even with demand looking good, we may see delays in new construction lots being acquired and delays in production. Builders may wish to assure the demand is feasible before continue to build at the pace we saw early on this year.
Although not as discussed, mortgage forbearance has also had an impact on the number of homes on the market. One on hand, it’s great that the government is stepping in and taking action to help prevent homeowners from losing their homes during the pandemic, but it also diminishes the number of foreclosed properties from entering the housing market.
Many homeowners who were expecting to purchase homes have lost their jobs and are no longer able to do so without verifiable income. Many areas are forcing homeowners to shelter-in-place, preventing them from visiting listings or having folks view their home.
All of these factors are contributing to the decline of housing supply. Altos Research states that there are only 700,000 single-family houses currently on the market compared to 900,000 from last year at this time. This time of year typically shows a rise in housing supply as Spring is a popular time to buy. The Covid-19 pandemic has prevented this from happening as we see housing supply continue to diminish.
Until the pandemic passes, normal housing market behavior is not expected. Only time will tell.