How Will the Housing Market Recover From the New Recession?

The world has changed dramatically since the start of 2020. Unemployment is on the upswing, mortgage rates have declined significantly and the COVID-19 impact on real estate is significant. But when and how will the recession hit the housing market? And what will the effect be on real estate investment and consumer behaviors?

A recent First American DataTree webinar featured two real estate experts —  Michael Fratantoni, Ph.D., Chief Economist, Mortgage Bankers Association (MBA) and Rick Sharga, CEO, CJ Patrick Company. During the webinar, they delved into the facts and trends, comparing this point in time with the 2008 recession and offered perspectives on market recovery.

Sharga shared with us some of the highlights from this session and his perspectives on the future.

By the Numbers: What Are We Seeing?

"Home sales in March, April and May — traditionally three of the most active months for home sales during the year — grew progressively worse." summarizes Sharga. "This threatened to drive 2020 transactions down to levels not seen since the Great Recession."

But, this recession has been very different. According to Multifamily Executive:

"Keep in mind that the economic downturn of 2020 is not the one of 2008, which was influenced directly by real estate. This time around, real estate — both residential and commercial — was on solid footing and going strong when the disruption hit. Short-term pain might mean undervalued assets that could produce long-term gains."

Here's more good news.

According to Sharga, in an exclusive PropStream interview, the market is showing unexpectedly robust signs of life, based on data from First American DataTree®. He reports that new listings of homes for sale, which had peaked at 167,000 during the week of March 1st and bottomed out at about 102,000 during the week of April 12th, rebounded to over 139,000 by mid-June.

Pending sales, the final stage of the purchase process before the transaction closes, also shows a positive trend. They soared from a low of slightly over 26,000 at the end of April to an incredible 96,000 by the week of June 14th.

While the number of listings and sales still lag behind totals from the same period last year, Sharga states that "pent-up demand from tens of thousands of prospective homebuyers is helping the market claw back some of the sales it would normally have seen earlier in the spring."

Sharga also asserts that another way to assess and predict the strength of the housing market recovery is to compare the drop-off in sales to the upsurge in pending sales activity. Sharga says, "DataTree juxtaposes those two aspects of the data, showing that future sales activity spiked at precisely the same time that current sales fell off. This, at least, implies that some of the transactions that would have taken place over the past few months have probably been delayed rather than lost for the year."

Consumers Are Ready to Buy

"Another indication that homebuyers are ready to transact is the huge spike in mortgage purchase loan applications," says Sharga, quoting the weekly Mortgage Bankers Association report. "Their report shows that after a drastic dip in March, the volume of purchase loan applications began to recover after several weeks and soared by about 150% from its low point. Applications have consistently exceeded last year’s numbers for more than a month."

The Mortgage Bankers Association reports that total originations for 2020 are expected to hit $2.6 trillion in 2020 and then dip down to $1.9 trillion in 2021 and 2022 —  a stark contrast to less than $800 billion in 2008.

Other Real Estate Pros Offer Their Perspectives

Many in real estate are optimistic, despite the pandemic. "What recession?" asked one real estate broker we consulted. Many real estate professionals are currently reaping the benefits of low rates, new migration patterns (from cities to suburbs), and investor activity.

But other real estate experts are keeping one finger on the pulse of the future. According to Ashley Baskin, a licensed real estate agent, who serves on the advisory board for Home Life Digest, four key factors will have an impact on the market in the years ahead:

1. The COVID-19 pandemic: Baskin expects to see a direct correlation between pandemic recovery and real estate activity.
2. Economic recovery: "The U.S. has seen volatility in the market since early 2020," Baskin notes."Government aid from the CARES Act provided much relief to businesses and individuals. However, the aid is drying up, yet the economy is still hurting. The amount of aid available will have an impact on the recovery of the housing market. If aid continues, we can expect the same trends to continue; however, if aid ends, we can anticipate an influx in available homes on the market as many Americans are forced to sell."
3. Presidential election: The election results will likely affect the market, although Baskin expects recovery to be slow either way.
4. Bubble bursting:  "We have been in a sellers’ market for the last decade," says Baskin. "The challenges of 2020, as well as the Baby Boomer population getting older ... is expected to cause a shift in the real estate market; a transition to a buyer’s market. We expect that supply will increase and home prices will go down."

These four factors will be critical in determining the future of the residential housing market. The pandemic and associated unemployment rates (especially in industry sectors such as brick-and-mortar retail, hospitality, and food service) have suffered the most significant impact, and those consumers and investors in those sectors will have the slowest recovery curve. Additionally, because COVID-19 has had a more significant impact in specific geographies, those areas will also bear the brunt of a slower real estate recovery.

Trend Tracking Is More Important Than Ever

Because we're living in a unique and unprecedented time for our industry, real estate professionals — brokers, agents, and investors — must make market intelligence a higher priority. Understanding both high-level financial trends and neighborhood-specific data is imperative to survive and thrive in the years ahead.

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