Reuters: U.S. home prices will defy the current economic downturn and ride out the storm, supported by record low mortgage rates and limited supply, according to a Reuters poll that showed housing outpacing consumer price rises this year and next.
The U.S. housing market, which was at the epicenter of the previous financial crisis that led to a global recession, is expected to remain a bright spot amid a sharp downturn as the coronavirus pandemic continues to wreak economic havoc.
The pandemic has infected more than 2.2 million people in the United States, claiming around 120,000 lives and infections are rising in many parts of the country.
According to the June 9-19 poll of over 40 housing strategists, house prices will rise 3.0% this year and next.
Three months ago they were expected to rise 3.4% and 3.2% respectively, so the forecast is remarkably stable, given the economy is taking its worst hit on record and unemployment has soared to levels not seen since the Great Depression.
“Housing demand is coming back in dramatic fashion, with homebuilders in markets all around the country reporting a bounce-back in demand in May and June,” said Brad Hunter, managing director at real estate advisory firm RCLCO.
“Price reductions will be mostly confined to the lower tranches of the market.”
These inflation-beating projections – the U.S. Federal Reserve’s own median projections expect consumer inflation of 0.8% and 1.6% this year and next – come with mortgage rates at record lows and a persistent undersupply of homes.
Housing demand, highly sensitive to mortgage rates, has steadily declined since last November. But the average 30-year mortgage rate hit a new low of 3.3% this month, providing an impetus for buyers to lock in cheap borrowing rates.
Tight inventories that have underpinned the housing recovery since 2012 are expected to be squeezed further after construction came to a standstill when much of the U.S. economy was closed for nearly two months to reduce the spread of the coronavirus.
Over 60% of analysts, 21 of 34, said a return in U.S. housing market activity to pre-COVID levels would be gradual. Eight said the turnaround would be quick, two said it already had, and the remaining three said it would be slow and long.
Apart from weak activity, the main threat to the U.S. housing market is unemployment, which jumped from record lows to record highs within a couple of months.
Nearly three-quarters of respondents, 25 of 34, said high unemployment, currently at 13.3%, was the biggest hurdle for the market over the coming year. Six cited a lack of supply of affordable homes, three picked stringent lending policies.
“The only factor supporting the housing market really will be very low mortgage rates. But again, I don’t think that will more than compensate for elevated unemployment and relatively weak consumer confidence,” said Sal Guatieri, senior economist at BMO Capital Markets.
Still, only a few analysts were expecting house prices to fall in 2020, a stark difference from the 2008 crisis, when property values plummeted by more than a third.
“A disproportionate number of job losses were among the lower-paid sectors… (so) we should not see house prices fall as much as they did during the Great Recession,” added Guatieri, implying that most of the unemployed were not existing homeowners or looking to buy a home before the pandemic hit.
“We do anticipate a much more moderate decline in house prices and that’s simply because even though demand will remain relatively weak, supply has been weak as well,” he said.
Even under a worst-case scenario, property prices were expected to drop only 1.2% this year and 1.0% in 2021.