The most extraordinary feature of the COVID-19 economy is not the record wave of the stock market. It is the phenomenal and unforeseen boom in the most fundamental and economically sensitive area of all, the sector that one would think would be among those most affected by the worst recession in decades: housing. According to an industry insider, the current price spike will continue for months to come, even as the extraordinary sales momentum of the past few months slows to a more normal pace.
“Buyers cannot buy houses that are not for sale, so the prices of the relatively few on the market are rising. That means the price increases will continue to work until there is more inventory. And the new offer will come slowly. “
The first is the lead time required by homebuilders to generate new supplies, following the slowdown from March to May. Second, baby boomers stay in their colonies and ranches while their children return home, curbing the traditional flow of retirees putting their mansions on the market. The third restriction: the widespread tolerance of banks and federal agencies that allows highly stressed homeowners, who would otherwise be forced to sell, hold out for now.
But Pinto predicts that when lenders end their grace periods, a wave of foreclosures will hit the market and push prices lower. The most vulnerable group, he warns, are low-income Americans, and especially minorities, who have bought with FHA mortgages in recent years. That will be the main force that will cause a strong price correction at the lowest levels ”.
In August, home prices nationwide rose 8%, according to a survey by the AEI Housing Center, outpacing the 5.1% year-on-year increase recorded in the final summer month of 2019. Believe it or not, the trend is now accelerating to double digits, where Pinto expects the rate of appreciation to hold: for the week ending September 11, prices across the country were up 12.5%.
Of course, it is the confluence of hordes of families buying houses and the lack of for sale signs in America’s neighborhoods that is driving prices at such a spectacular rate. Bargain home loans that offer very low monthly payments are exerting a powerful pull on buyers. Since mid-2019, the 30-year mortgage rate has fallen steadily, from 4% to the current 2.94%, a record low. Millennials are entering their prime homeownership years with an average age of 30 to 31. A relatively small proportion of young middle- and upper-middle-class couples on their way to buy houses have lost their jobs. Now, the COVID-19 economy is motivating many young couples to move out of the cities and do something they had never thought of, buy a home in the suburbs, or do it much earlier than originally planned.
So far this year, the contracts signed are 27.5% above the 2019 level, according to AEI, which measures the volume of buyers who have just obtained loans, a data that is a proxy for pending sales.
That 27.5% average is depressed by the sharp decline in March and April. From May to August, new contracts exceeded the 2019 count by more than 50%. But since the beginning of September, the numbers have fallen again. “We are seeing a decrease in activity, although sales will remain above last year’s levels,” says Pinto.
The lever that is now taking over as demand recedes is the ongoing large reduction in inventory.
