We’re in the midst of severe economic shock right now. There were over 30 million job losses in one month, closed businesses, and a 4.8% drop in the GDP, but somehow home prices are rising in some places. That may be a disappointment for homebuyers and real estate investors looking for a deal, although some researchers see lower prices in the coming months.
Home prices dropped dramatically during the housing crisis ten to twelve years ago, but that’s not what’s happening this time around so far. As the Wall Street Journal points out, we’ve been dealing with a tight inventory for years and, right now, supply has gotten even tighter because sellers don’t want to list their homes and because many builders have put things on pause. (1)
Demand Continues for Too Few Homes
Sellers may have decided against moving in the midst of the pandemic, or they don’t want potential buyers walking through their homes. Whatever the reason, a decline in listings and a tighter supply in the midst of homebuyer demand means that prices are not going down.
The National Association of Realtors say there were 1.5 million homes for sale at the end of March. That’s more than 10% fewer listings than last year. That doesn’t mean that we won’t see a surge in listings, at some point, but sellers appear to be holding back right now. (2)
And even though we may have fewer buyers willing to buy homes right now, supply has fallen more quickly than the number of potential buyers. Zillow economist, Skylar Olsen, says, “Demand… got a kick in the gut, (but) so did supply.” That’s making it tough on the buyers who are ready to pull the trigger because there are fewer homes to choose from, and not many bargains.
Sellers Are Not Slashing Prices
Sellers who remain in the market are also less inclined to slash prices. Realtor.com says, only 4% of sellers reduced their prices during the last week of April. During that same week in 2019, almost 6% of sellers had done so.
Some sellers feel their homes are priced correctly, but that buyers are not making offers because they need to see homes in person. And, they may not be able to do that easily until stay-at-home orders are lifted.
Exactly where are we right now with home prices? According to NAR’s report on existing-home sales in March, prices rose for a 97th month in a row. (3) The median for a single-family home is now $282,500. That’s up 8% from March of 2019. NAR’S chief economist Lawrence Yun says, even with slower sales and more disruptions to home sale activity in the coming months, “home prices will still likely rise.”
What would it take for prices to go down? Yun says, “In the next 12 months it’s hard to anticipate price declines because of the mortgage forbearance in place. You would have to see continuing job losses for a prolonged period leading to foreclosures, and even then we may not have an oversupply.” So he believes that even with some foreclosures, it won’t be enough to solve the housing shortage, and that’s what’s pushing prices higher.
Potential Drop in Home Prices
Zillow analysts are seeing something a little different. (3) They are predicting that prices will decline through the rest of the year, slightly, and will bounce back next year. They say, we’ll see a 60% drop in home sales because buyers will postpone their home-buying plans and that prices will drop 1% to 4%, from pre-coronavirus levels.
That’s based on three different recovery scenarios with greater or lesser price declines. The first scenario embraces an optimistic outlook where we see a small 1% to 2% dip in home prices during the 2nd and 3rd quarters. That would be followed by a quick V-shaped recovery.
The second scenario is based on a U-shaped recovery that extends through the end of the year. Price declines could be as much as 2% to 3%.
And the third scenario would be a longer U-shaped recovery with housing market weakness through all of next year. That could result in prices that are 3% to 4% lower.
Zillow researchers say, the housing market was well-positioned going into this crisis. Home buyer demand was strong and low mortgage rates made for “friendly” buying conditions. The economy was also relatively strong, with an unemployment rate of just 3.5% and high labor-force participation. There were concerns about global issues, a struggling manufacturing sector, high corporate and government debt levels, and a federal funds rate that was too low. But even so, the real estate industry expected a strong spring buying season until the pandemic upset those plans.
Zillow researchers say, “The disruptions have been shocking in both their speed and scale. But even so, we believe many of them to be transitory and will be addressed as the economy opens up again.”
If prices only drop 3% to 4% and we don’t see a major foreclosure crisis, I’d say the housing market will emerge without much damage, and help lead the nation out of the current downturn.
(3) Zillow Article