June 2020 Hausing Market Forecast

In the first of our series of monthly housing market forecasts, we predicted a “Flying W” recovery, with an initial sharp drop due to the rapid onset of the pandemic, a noticeable rebound in the summer followed by another dip in the fall, and finally, a stable road to recovery by spring 2021. Our June 2020 update suggests our forecasts are still following this trajectory, and that June is likely the trough for home sales, mortgage originations, and building permits, the peak for refinancing, and the start of a long period of cooling home price growth. Unlike our May 2020 update, however, the magnitude of the deviation from last year’s monthly benchmark remains unchanged, suggesting the uncertainty of the pandemic - while still very real - has not worsened. This stability is welcome news for those looking for prospects of a more stable recovery. Stil, the threat of a resurgence of the virus as well as fleeting pent-up demand means that we are likely to see a mini-dip in housing market activity in the fall.

Home Sales and the Mortgage Market

Our forecasts for single-family home sales and purchase mortgages continue to show they will bottom out in June, with a decrease of about 60% and 85% on a year-over-year basis, respectively. This is unchanged from our May forecast update for June. Our tiny revisions reflect more predictable impacts of the pandemic on employment, GDP, and household income that have surfaced over the past month, including a surprise increase in the number of employed persons in May. Our forecast trajectory still takes the shape of “Flying W,” with June being the bottom of the first leg of the “W” shape.

For mortgage refinance originations, our models suggest volume will actually peak in June by about 160% on a year-over-year basis, and then fall quickly throughout the remainder of the year. While the Federal Reserve Board of Governors has hinted they’ll keep interest rates low through 2022, we think the 10-year Treasury Note yield will rise later this year as a result of the economy starting to recover, which should dampen demand for refinancing. Fortunately for the mortgage industry, as demand for refinancing wanes, demand for purchase originations begin to rise, which should partially offset one another and lead to more stable aggregate volumes of mortgage originations.

Single-Family Housing Permits

Our short-term forecasts of building permits have narrowed and predict a 55% to 65% decrease in June, followed by progressively small declines (and even the possibility of a year-over-year increase) through the fall before further cooling by early winter. The wavy recovery of building permits reflects a combination of delayed spring projects being pushed to the summer months as permitting jurisdictions open up their pipeline and industry caution over initiating new projects before the course of the virus has seen its final days.

Home Prices

The shape of our home price forecasts have changed somewhat, while the overall magnitude of the price change is still similar to previous forecasts. The primary difference is that the second trough of the W-shaped home price recovery now has a flat, instead of “v” bottom, whereby the second dip is prolonged compared to previous forecasts. Instead of the trough hitting for a few months in the beginning of 2021, our forecasts are now showing the trough to extend through July of 2021. However, the magnitude of the trough has changed little, with price growth ranging from -1% to 1% on a year-over-year basis depending on which one of our forecast scenarios you follow.

At the regional level, our 12-month forecasts of prices and sales suggest that June 2021 will be a period of full-on recovery for most U.S. markets, with a majority U.S. metro housing markets experiencing sharp increases in prices and home sales. This shouldn’t come as much of a surprise, however, since July 2021 is the month that our national forecasts project the flat-bottomed second dip in price growth to end. Click the link on the map below to see detailed regional forecasts for your market.

Concluding Thoughts

It’s important to emphasize here that while we expect a rebound in housing market indicators over the coming months, the threat of another dip remains real in the late fall and early winter, even if the virus DOESN’T make a significant resurgence. This is because the upswing that we’ll see this summer is a result of pent-up demand from homebuyers and supply-in-progress from homebuilders that has simply been pushed off a few months. However, after this pent-up demand goes away, the true economic scarring due to the pandemic will begin to affect the housing market as the tide of pent-up demand goes out. This aggregately lower demand could plummet even further if the virus makes a comeback in the fall, and would most definitely push off any sense of a housing market rebound to the middle of 2021. Our next update will be released in the third week of July.

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%. Our July Hausing Market Forecast will be released in the third week of July.