Looking for a little clarity on this week’s news? Windermere Chief Economist Matthew Gardner looks at how housing prices have reacted to COVID-19 and what’s to come.

There’s an overwhelming amount of data and headlines circulating. This column is my attempt to make sense of it all for you, the real estate professional, from an overall economic standpoint.

Let’s talk about home prices and what you can expect to see as we move through the balance of this year.

When I first got wind of the COVID-19, my immediate expectation was that the country was going to go through a period of significant economic destruction that was going to be the inevitable consequence of a scientifically ordered lockdown.

And here we are, 12 weeks into COVID-19 life, and there certainly has been significant economic destruction here in the United States and around the world.

Although better in May than in April, the unemployment rate still stands at an elevated 13.3 percent.

The U.S. economy shrunk by 5 percent in the first quarter, and the second quarter will show an even greater contraction in economic activity.

So, we are living through a period with some really ugly economic numbers, and whenever the economy heads south — even if the contraction is expected to be temporary — there will always be some people who will get on their soap boxes and forecast Armageddon for the housing market.

Well let me start with saying this: Don’t worry, they will be wrong. 

But that said, there are some talented economists who have started calling for modest COVID related price declines.

A couple of weeks ago, Zillow put out a paper suggesting home prices will drop by 1.8 percent between now and this October, but it did say that price growth will pick back up again this winter.

I also read a report from CoreLogic that’s forecasting home prices dropping by about 1.3 percent between now and next April.

And these two forecasts piqued my interest as a drop in U.S. housing values is actually extremely rare.

In fact, since World War II, on an annualized basis, home prices have dropped only twice — the first time was a very modest drop of less than 1 percent in the summer of 1992, and the second, as you will all remember, was following the bursting of the housing bubble. 

Where we are and where we’re headed

So where are we are headed when it comes to home values in 2020?

Some of you might remember that at the start of this year I had forecast U.S. home prices rising in 2020 — with prices up by 5 percent — decent growth, but still the lowest pace of appreciation since we emerged from the Great Recession.

Well, that was my forecast back in January, and as we are all aware, things have certainly changed.

When COVID-19 hit, the dynamic of housing markets across the country changed, and to really understand those dynamics we can’t simply look at monthly aggregated data, but need to turn our attention to higher frequency data — and I like to look at movements in the market on a weekly, not monthly basis.

So I have pored through the weekly numbers, and unsurprisingly, the country started seeing significant drops in list prices, pending sales and closed sales starting in early March through the middle of April.

At the same time, there was a sizable jump in the number of homes taken off the market.

Housing was clearly reacting to COVID-19.

Sale prices also started to pull back, but not until the end of April, as there is always a lag.

So given this information, I think it’s very reasonable to expect home prices to have dropped in May, and this might be why some are forecasting a longer contraction.

But we appear to be starting to get a handle on the virus, business activity has modestly started to rise, and I am starting to see some green shoots appearing in the housing sector.

When I look at numbers over the past few weeks, I see new listing activity starting to rise — not everywhere — but in many markets.

Pending sales have also started to trend higher, and more importantly, the median list price of homes coming to market has also started to rise and is now close to the pre-COVID-19 peak we saw in February. And over the past two weeks, we have seen sale prices start to rise again.

What does all this mean?

The pandemic-induced slowdown killed a significant portion of the spring buying season, but there was a side effect and that was the creation of significant pent-up demand from homebuyers — who had pulled back from the market earlier in the year because of COVID-19.

So with listings starting to rise again, buyers will reappear. In fact, they already are reappearing. We know this because applications for new mortgages are on the rise, not just week-over-week, but year-over-year, and I believe that the cancelled spring buying market will become a summer buying market.

Of course, not all markets are created equal. There are areas across the country that were hit harder by COVID-19 than others, generally markets with major leisure tourism industries. I expect that these areas will take longer to see a housing recovery, but they will recover at some point.

And I agree with the other economists who are looking for prices to drop, but it’s my position that the contraction in price will be very short lived. As we move through the summer, U.S. home prices will start to rise again and eke out a modest year-over-year price gain of around 1.7 percent as buyer confidence returns and mortgages remain very competitive.

In closing, we are emerging from a situation that really has no precedent. And it’s human nature to freeze up when faced with anything that scares us. And that’s, in essence, what we saw in the housing market — a freeze — but I absolutely believe that warmer weather is on the way. 

Housing will recover as we move through the second half of this year, and anyone who’s still hoping for a 2008-style collapse will be sadly disappointed.

Matthew Gardner is the chief economist for Windermere Real Estate, the second largest regional real estate company in the nation. Listen to him speak at Inman Connect Now

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