Zillow Chief Economist Svenja Gudell forecasts a small decline in prices with a full rebound by the end of 2021.

A Zillow study is forecasting home prices will drop 2-3 percent in 2020, before rebounding next year. A combination of strong buyer demand and a healthy housing market will prevent prices from plummeting in the wake of COVID-19.

Svenja Gudell | Photo credit: Zillow

There are more pessimistic possibilities, however, which include a 3-4 percent drop and home prices not recovering in 2021.

“Much uncertainty still exists, particularly with some states beginning to reopen and experts warning of a possible second wave of the coronavirus in the fall,” Svenja Gudell, Zillow’s chief economist, said in a statement. “However, housing fundamentals are strong — much more so than they were leading into the Great Recession — and that bodes well for housing in general.”

“Despite the difficulties, we’re seeing several signs that there is still a good amount of demand for housing, and buyers, sellers and agents are growing more comfortable moving transactions forward where possible,” Gudell added. “For those who need to sell, buyers are out there, and there are ways to embrace technology and practice social distancing to ensure a safe process.”

Zillow’s forecast says home sales will decline as much as 60 percent in the spring and take until the end of 2021 to recover. Prices will likely recover a few months sooner.

The recovery, according to Gudell, will look like a check mark, with transactions rising at a pace of roughly 10 percent each month through the end of 2021.

Research and visual credit: Zillow

March was expected to be the hottest home shopping season in years, according to the forecast, with record-low inventory and interest rates as well as high buyer demand. Many of those underlying dynamics still exist so the impact on the market could be much lighter compared to the nearly 25 percent drop in prices and five-year recovery seen during the Great Recession.

The more pessimistic scenario — of which the forecast says there’s a 25 percent likelihood — is a 3-4 percent drop in prices with continued weakness through 2021. The more optimistic scenario — of which there’s a 5 percent likelihood — features just a 1-2 percent dip in home prices in the middle of 2020, followed by a robust recovery.

The forecast is based on a projected 4.9 percent decrease in gross domestic product in 2020 and a 5.7 percent increase in 2021.

Email Patrick Kearns

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