The Flying W: Why the Great Lockdown Housing Recovery Will Be a Wavy One

Highlights from this report:

· Our forecast suggests the housing market recovery will look like a flying W, with an initial sharp drop this spring, a noticeable rebound in the summer followed by another dip in the fall, and the final solid road to recovery by spring 2021.

· We expect home sales to experience a 35% to 45% year-over-year slump over the next three months.

· Purchase mortgage originations will take the largest hit across all of our housing market indicators, showing a 45% to 65% drop by June 2020.

· Refinance mortgage originations will continue to see an extremely large year-over-year increase, peaking around 165% by July 2020.

· We forecast single-family building permits to decline between 32% and 50% year-over-year throughout the remainder of the year.

· The year-over-year growth in home prices will hit their low point in February 2021, with a year-over-year growth rate of between -0.2% and 2.5%.

· In the most severe scenario, we expect home prices to fall by between 1%-2.5% in the hardest-hit markets in the Pacific Coast, Nevada, and Florida.

There’s an old joke that says you know economists have a sense of humor because they use decimal points in their forecasts, and we’re here today to provide our readers with an informed sense of humor by offering broad guidance on how the U.S. housing market will be hit by, and recover from, the COVID19 recession. The top line here is that our models suggest the housing market recovery is likely to take the form of a flying W, with an initial sharp drop this spring, a noticeable rebound in the summer followed by another dip in the fall, and finally, a stable road to recovery by spring 2021. Below, we present our forecasts for home sales, mortgage purchase and refinance originations, housing permits, and home prices with a range of forecasts for each indicator based on a light, moderate, and severe impact to the U.S. housing market. For a high-level description of our forecast methodology, see the methodological notes below.

Home Sales and the Mortgage Market 

Across our five indicators, we are forecasting single-family home sales and purchase mortgage originations to take the brunt of the impact on the housing market from the COVID19 pandemic. Why? Because there is likely to be both a reduction in demand and supply. On the demand side, we expect uncertainty over the prospects of the U.S. economy, fears overexposure to the virus during the homebuying process, and tightening of credit standards to dampen demand for homes in the short run. At the same time, we expect home sellers – who often are also buyers – to hold back on listing their homes because of concerns over their ability to sell and also purchase another home. Our forecasts suggest this reduction in both demand and supply will lead to a reduction of home sales and purchase mortgage origination between about 38% and 45%, respectively, in the light scenario to 44% and 65% in the severe scenarios.

On the other hand, our models suggest refinance mortgage origination volume will actually spike over the coming months by about 157% to 175%. This is not only due to opportunistic homeowners seeking to take advantage of historically low mortgage rates, but also because homeowners who are severely impacted by the COVID19 recession will seek to pull cash out, modify their existing terms, or otherwise restructure their current mortgage to help them weather the downturn.

Single-Family Housing Permits

Similar to the expected drop in home sales and purchase originations, we also expect homebuilders will pull back on initiating new projects, and thus project a year-over-year drop in single-family building permits of between 30% and 50% this spring. Our forecasts also show a rebound by late summer, as local permitting offices reopen and homebuilders begin to push through a backlog of existing projects that were ready for permit applications. However, once this backlog is cleared by early fall, we expect another sharp pullback of permits as homebuilders take a more cautious approach to breaking ground on new projects. The fill recovery finally begins in spring 2021 as the bulk of the economic impacts of the COVID19 pandemic pass.

Home Prices

So what does all of this mean for the holy grail of housing market metrics – home prices? While we certainly might expect listing and even median sales prices to dip slightly this spring (as sellers who put their homes on the market in February and early March try to quickly unload), we are only anticipating a sharp cooldown of quality-adjusted prices to between 0% and 2.5% on a year-over-year basis at their trough in late winter of 2021.

Why aren’t we forecasting national price declines? Three reasons: (1) home prices are what economists call “downward sticky,” which means that when faced with taking a loss on the sale of a home or taking it off the market, home sellers will tend to the latter, (2) supply will fall roughly in line with, or even more than, demand over the next 12 months, and (3) relief provided by the federal government in the form of mortgage forbearance, suspension, and deferral, combined with additional unemployment support and stimulus checks, will help keep financially distressed homeowners in their homes instead of having to foreclose or short sell. This will lead to much fewer distressed properties than during the Great Recession, and as such, very little downward pressure on home prices.

While we don’t expect national prices to decline in our light or moderate scenarios, it’s worth noting that in our severe scenario, national prices do go through a very short period of year-over-year decline in February 2021. What’s more, our severe scenario is forecasting modest price declines (no more than 2.5%) over the next year in about a quarter of the largest 400 U.S. housing markets. Markets with the most significant declines are primarily in the hard-hit Pacific Northwest, markets heavily reliant on tourism, such as those in Nevada and Florida, as well as pricey markets in California that were early adopters of shelter-in-place orders (San Francisco, San Jose, and Oakland).

The original post can be found at the link below:

Methodological Notes

While Haus’s national and regional economic forecast models remain proprietary, we can provide some high-level detail on what they include. First, we develop three macroeconomic scenarios of how gross domestic product, household income, and household and prime-age population growth might respond to the impacts of COVID19. We then use these scenarios at the national and metropolitan level to predict how our housing market metrics might respond given past movements to recessionary periods but modified to reflect the atypical “quick and deep” plunge of a pandemic compared to the typical slower onset of previous recessions. We employ a random forest regression technique to predict monthly changes in our housing market indicators over the upcoming 60 months. Our median absolute error rates range from 6% for home prices to 10% with a median non-absolute error of -0.04% - 0.08%.