COVID-19’s Impact On Mortgage and A Guide To A Slowdown

The housing market entered 2020 with momentum, but fear has a way of deferring choices. As an industry, we need to educate buyers.

By Ali Wolf

Sentiment drives behavior and today’s economy is handing consumers things to be concerned about, whether that’s panic from seeing empty shelves at the grocery store to volatility in the stock market. We can, however, use the current environment in our favor. Rates are down roughly 75 basis points compared to this time last year and that means big savings for home buyers.

We broke out the savings to consumers in three different ways.

First is by monthly payment difference. In top markets across the country, consumers got between $100 and $400 a month back due to lower mortgage rates. This change reflects that while home prices are high, monthly payments create a compelling case against the for-rent market and help shoppers on the margin afford a home.

Next is by price cut equivalent. Consumers have been looking for a ‘deal’ ever since the fire sale of housing in the second half of 2018. Today’s low mortgage rates represent the equivalent of a $20,000-$80,000 price cut depending on market year-on-year.

Last is monthly payment equivalent to past years. Affordability will continue to be a top issue for the housing market. In some metros, however, the change in mortgage rates is enough to turn back time. When looking at today’s home prices and mortgage rates compared to the respective data of prior years, we see some markets like Los Angeles and Washington D.C. hitting levels of affordability not seen in at least six years.

In regards to traffic, we found that it is positive on a year-over-year basis, capturing the early and strong start to the spring selling season. In fact, the four-week average for traffic was at the highest level since April 2018. We also noticed that traffic pulled back notably week-over-week, however, on both a total and adjusted per community basis.

Your Non-Freak-Out Guide To A Slowdown

Incoming data is not going to be very helpful for a couple of months, which makes relying on logic and history critical.

The economic concern with COVID-19 is that it directly impacts the consumer. We’ve consistently written how the consumer is the linchpin of the US economy and lower levels of spending from the public mean slower economic growth.

It’s a given we will have an adverse economic impact in the first and second quarters of 2020. This also raises the possibility of a recession in the middle part of this year. Here are the key datasets to follow: Real GDP, real income and employment, industrial production, and wholesale-retail sales.

GDP is a rollup of all the moving parts in the economy. We believe GDP will fall to 0.5%-1.0% for 1Q and from -1.5% to -0.5% in 2Q. Our forecast is based on the fact that the service sector is the biggest part of the US economy, which is dependent on consumer spending.

The labor market could not have been stronger heading into the outbreak with the unemployment rate at a 50-year low after the longest stretch of job growth on record. Equally, we had business leaders that were already reaching peak concern about future growth due to recession fears, increased competition, the trade war, and geopolitics. As such, slower demand resulting from COVID-19 will put hiring plans on hold and may result in layoffs.

Changes to the retail environment, whether through store closures, limited hours, or layoffs are critical to monitor. We’ve already seen changes for retailers via lost revenue as people work more from home and companies suspend travel.

If closures and quarantines pick up, though, Americans are bound to get bored. When considering that, retail spending’s silver lining will be online shopping, food delivery services, and grocery stores.

Learning from the Past & Moving Forward

COVID-19 falls under the umbrella of what economists like to call: exogenous shocks. Generally speaking, a slowdown caused by an exogenous shock is less painful than a financial crisis. An exogenous shock that isn’t contained, however, can turn into a financial crisis.

The good news we see is that the duration of COVID-19’s impact on the US economy could be quite short-lived because of governments’ willingness across the globe to enact measures and offer policy support.

In the housing market, we have to look at the opportunity. Americans need housing in good times or bad. With reasonable confidence and job stability, though, we can continue to see opportunistic buyers excited about the sub-4.0% mortgage rates.

History tells us that in the worst-case scenario, a recession, the slowdown lasts an average of 11 months. Short-term demand is at the highest risk as consumers take in all the new information. Given the development horizon, though, we have to plan ahead and position ourselves to capture the pent-up demand fueled by COVID-19 uncertainty, changing life stages, a rebound in the wealth effect, and aging Millennials and Gen Z’ers.

Ali Wolf is the Chief Economist at Meyers Research. She may be reached at awolf@meyersresearch.com

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