While a real estate market crash has not been exactly defined, there are certain conditions that precede it, the most prevalent of which are rising demand from either first-time buyers, or those upgrading or buying second homes, or speculative investors. This generally happens in a rising interest rate scenario and in conditions where supply remains tight or just about at the level that demand is satisfied. So, even as home prices continue to increase, people continue to buy while financing at higher rates of interest.
Naturally, this is not sustainable for an indefinite period of time. Buyers eventually reach a point where they refuse to buy any more, which again pushes up inventories and the days on market. Prices start coming down/normalizing and when this adjustment is significant, it’s called a crash.
So putting today’s scenario in that context, let’s see what’s happening.
According to the latest report from the U.S. Department of Housing and Urban Development, housing starts for March were down 22.3% from February 2020 while increasing a mere 1.4% from a year ago (seasonally adjusted). So supply is not being built up rapidly.
Building permits were down 6.8% from February and up 5.0% from March 2019 (seasonally adjusted).
Finished units were down 6.1% from February and down 9.0% from last year. Under-construction units were down 0.2% from February and up 7.7% from last year. This definitely doesn’t look like an inventory glut.
Also, going into the pandemic, which impacted the U.S. in March, we were in a strong season because of shortage in the affordable housing category driven by millennial demand to set down roots. This unsatisfied demand remains and has likely been pushed back a couple of months, or at least to a time when buyers won’t consider house-hunting a risky proposition any longer and sellers will feel more confident about inviting unknown strangers in.
As regards pricing, a recent report from online real estate database company Zillow says that since homebuyer demand remains strong, prices aren’t expected to decline more than 2-3% in 2020 (previous expectation was for a 3.3% increase in 2020 and 2.7% increase in 2021). It expects prices to start increasing again from the second quarter of 2021.
Contrast that with the last housing market crisis between 2008 and 2012 that was driven by subprime defaults that sent home prices down 30%.
This time round, while housing confidence has reached 2011 levels, according to the Fannie Mae Home Purchase Sentiment Index, the scenario is different because while 46% of those surveyed said it was a bad time to buy, 65% said it was a bad time to sell. “We expect that the much steeper decline in selling sentiment relative to buying sentiment will soften downward pressure on home prices,” said Doug Duncan, chief economist at Fannie Mae.
The Federal Reserve has lowered interest rates to 0, to help businesses respond to the pandemic. At the same time, the 30-year mortgage rates that buyers have to pay have moved from 4.14% in May 2019 to 3.26% in May 2020. It was 3.45% in February. The 15-year average rate went from 3.57% last year to 2.73% last week. This again doesn’t look like a situation preceding a market crash, as outlined above.
While the current situation is not illustrative of a housing market crash, it doesn’t of course mean that the market will escape the situation unscathed. Concerns like temporary job losses or fear of job losses do weigh heavy on people’s minds. There’s also the concern that once the moratorium period is over, a large number of people will default on payments. The main thing to remember here is that the underlying fundamentals remain strong. So if the pandemic doesn’t last too long, or if we can find a vaccine/cure sooner rather than later, there could be a quick and sharp snapback.
The real estate -development industry is currently in the top 12% of the 250+ Zacks categorized industries. Some recommendations here include Zacks #1 ranked Consolidated Tomoka Land Co (CTO - Free Report) and Green Brick Partners (GRBK - Free Report) or Zacks #2 ranked BBX Capital Corp (BBX - Free Report) , Five Point Holdings LLC (FPH - Free Report) and Howard Hughes Corp (HHC - Free Report) .
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