Home Price Growth Accelerates – But for How Long?

Scott Anderson
Posted by Scott Anderson
Chief Economist

Despite unprecedented job losses in a wide swath of industries across the country since the COVID-19 pandemic arrived in the U.S., home price growth has unexpectedly accelerated.

According to CoreLogic, national home prices increased 4.8% from a year ago in May, an acceleration of more than one percentage point in home price growth since December 2019.

This is a Different Recession and Housing Market

The sudden collapse in U.S. economic activity – real GDP declined 5.0% annualized in the first quarter of this year and is projected to contract an unprecedented 35.1% in the second quarter – led some to speculate that the housing market would suffer a downturn on par with or more severe than the one experienced prior to and during the Great Recession when national home prices plunged nearly 32% from the peak in April 2006 to the trough in May 2009.

There are, however, significant differences between the housing market that helped trigger the 2008/09 economic downturn and today’s housing market that could be a casualty of the current pandemic.

The housing market today is not characterized by loose lending standards, low or no down payment mortgages, a preponderance of sub-prime loans and highly-leveraged homeowners like it was in 2008. This is evident by the record amount of tappable home equity that will enable more homeowners to withstand modest price declines without flooding the market with more homes for sale, limiting expected home price declines.

Moreover, housing entered this recession undersupplied rather than oversupplied, a significant difference relative to the pre-Great Recession housing market. Indeed, the months’ supply of existing homes for sale was an annual record-low 3.9 in 2019. While the months’ supply rose to 4.8 in May 2020, it is still well below the long run average of 6.7 from 1983 to 2019 and significantly lower than the 8.7 in 2007 entering the Great Recession. A lack of existing inventory places upward pressure on home prices as buyers compete for listed homes near-term, despite widespread unemployment.

Finally, government supports are helping a lot. Federal government programs designed to support the housing market during the pandemic are helping to limit home inventory on the market. According to Black Knight, as of June 2 the number of government-backed mortgages, primarily Fannie Mae, Freddie Mac, FHA and VA loans, in COVID-19 mortgage forbearance plans was 4.73 million or 8.9% of all active mortgages accounting for a little over $1 trillion in unpaid principal. A forbearance is when a mortgage servicer or lender allows you to pause or reduce your mortgage payments for a limited period of time while you regain your financial footing.

Still, far fewer homeowners in forbearance remitted payments in May than did in April, suggesting a rise in the underlying mortgage delinquency rate in May. The speed of the labor market recovery will dictate how many of the mortgages in forbearance will eventually be foreclosed on when the moratorium on foreclosures expires on August 31, 2020. Will homeowners be able to resume their monthly mortgage payments when the forbearance period ends?  A significant rise in foreclosures at the end of this year would increase the number of homes for sale and put downward pressure on home prices in 2021.

The Outlook for Home Prices

Our home price outlook is for the CoreLogic Case-Shiller National Home Price Index to begin showing slower home price growth in the second half of the year as still elevated levels of unemployment and income losses start to outweigh the solid fundamentals of the housing market going into this crisis. The home price weakness is expected to accelerate once the forbearance window closes later this year. By early next year, home prices should be on a widespread decline from a year ago, though our baseline forecast is we will not see the magnitude of home declines we saw in 2008 and 2009. We are forecasting, national home price declines of around 4.2% year-on-year by the second quarter of 2021.

If government housing market support is bolstered, or mortgage forbearance extended by additional government action, the day of reckoning for home prices could be pushed further into the future. This time truly is different.

To learn more check out this week’s U.S. Outlook Report.

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