The Housing Market is NOT Going to Crash
Many people are concerned the housing market will collapse due to rampant unemployment and a severe economic recession likely to result from the COVID-19 measures. The housing market is not going to crash; in fact, prices are more likely to go up in the short term.
Why would prices go up under these economic circumstances? Two factors will prevent a crash and cause prices to rise: reduced supply, and record-low mortgage rates.
Ordinarily, with massive unemployment, we would expect to see a surge in foreclosures. That is not going to happen. First, lenders learned during the housing bust that foreclosures drive prices down, so they now have forbearance programs designed to avoid foreclosure by helping borrowers survive difficult times, usually by deferring payments, extending terms, and so on. For the next three to six months, very few new foreclosures will be initiated as lenders and borrowers all try to work out new loan terms, and even after that, any future foreclosures that may be necessary will be at a measured rate to prevent floods of inventory from drowning the market.
Further, those people who aren’t making payments are not going to list and sell their houses even if they are broke and need the cash. Why? Because if they are unemployed and don’t have the money to make a house payment, they won’t be in any hurry to sell their house and start paying rent, particularly if they don’t perceive they are being hurt by failing to make their mortgage payments. It’s far more preferable for people who are struggling to stay where they are than it is to disrupt their families by selling and moving, and after doing so, face an increase in their monthly costs while they still don’t have a job.
With fewer people listing their homes for sale, and with nobody being forced to sell their homes by lenders, the number of homes available for sale will fall to historic lows. Rather than being flooded with supply, the supply is going to dry up.
On the demand side, we need to parse two demand factors that will move in opposite directions. Demand can be measured by volume, how many people are looking to buy homes, and demand can be measured by price, how much people are willing and able to pay to buy the available inventory. There is no question that demand volume is going to fall, perhaps precipitously because unemployed people don’t buy homes (not since the housing bubble anyway). However, record low mortgage rates enable those buyers who are still active to increase their bids because the low rates allow for bigger mortgages with the same payment.
According to a real estate agent, in the short term, the volume demand for housing will decline, but the inventory of houses available for sale will decline even more creating a shortage. The few buyers that remain will be enabled by low rates to bid up prices as they compete for the few houses that remain for sale. Reduced supply and increase buying power is a recipe for low sales volumes and rapidly increasing prices.
The housing market is not going to crash.