Housing Markets and the COVID-19 Crisis

The Issue:

The perception of falling prices of single-family homes and record levels of unemployment raise the specter of rising levels of mortgage defaults. Mortgage defaults in the wake of the economic and financial collapse in the Fall of 2008 contributed to the tepid economic recovery from that crisis, as well as personal hardship for those who lost their houses; by 2010, approximately 11.5 percent of single-family residential mortgages were delinquent and more than 2 percent were in foreclosure. There are concerns that similar developments now could derail economic recovery. But drawing parallels between 2020 and 2008 is problematic because conditions differ substantially across the two periods in the run-up to the crisis and in its first few months.

Given the unprecedented nature of recent events, it is not surprising that there is considerable disagreement over the near term, and longer horizon fortunes of housing markets across the country.

The Facts:

• Prior to the coronavirus crisis, the housing market had recovered from the 2008 Great Recession. Most single-family residential housing markets in the U.S. were very strong heading into 2020. Housing prices in the United States were rising in the period before the onset of the present crisis. The Case-Shiller Home Price Index was up nearly 4 percent for 2019. Housing starts had been rising for the last 10 years but remained well below historical values. Mortgage debt service payments as a percent of disposable personal income have been consistently falling since the end of 2007 and were at historical lows as of the end of 2019. Delinquency rates on single-family residential mortgages had been consistently falling since peaking at the beginning of 2010 and, at the end of 2019, were the same as in 2001. 
• Demand for housing declined during March and April. Mortgage applications in early April were down 35 percent as compared to one year earlier. One possible reason for this indicator of falling demand for housing is declining household incomes in the face of the massive increase in unemployment and plunging GDP. A possible moderating factor is the decline in long-term mortgage rates to an all-time low (3.15 percent for the 30-year fixed rate mortgage at the end of May). However, lenders have been hesitant to make housing loans amid expanded protections for borrowers as part of the federal government’s CARES Act and uncertain economic prospects. According to the Urban Institute, nearly two out of three loans made in 2019 would fail to meet the stricter standards lenders have imposed since March. 
• Sharply contracting listings of houses for sale is also a recent factor for declining home sales. The total housing inventory on the market, including newly constructed houses and those being resold, was down 10.2 percent in March as compared to one year earlier. Housing starts declined by 22.3 percent in March as compared to February, suggesting builders’ bleak expectations for future demand. These forces resulted in an overall slowdown in the housing market in March and April. Total existing-home sales fell 8.5 percent in March compared with February and tumbled a further 17.8 percent in April. 
• House prices have not dropped, but the rate of house price appreciation slowed. The graph depicts a weekly housing price index showing the percentage rise in housing prices as compared to one year earlier, the Year-over-Year (YoY) change. House prices have shown some deceleration; they were 7.2 percent higher YoY in the week of March 2, but only 3.6 percent higher YoY in the week of April 27. Yet, only 2 of the largest 40 metropolitan areas showed year-on-year declines in house prices at the end of April, San Francisco and Los Angeles. And for the week of May 18, housing prices are up 5.5 percent YoY.
• More recent data shows some recovery in the housing market. The chart shows that YoY housing price appreciation fell from the beginning of March through the beginning of May but began to rise again after that; housing prices are up 5.5 percent YoY for the weeks of both May 18 and May 25. Mid-May had a decline in mortgage applications of just 1.5 percent YoY. In fact, the AEI Housing Nowcast reports that for the week of May 18, people locking in mortgages at a prevailing rate was 16 percent higher compared to the same week in 2019 (similar to pre-pandemic numbers), although this also includes refinancing existing mortgages.