How will the US Real Estate Market Be Affected by Covid-19

Many US industries have faced massive challenges in the face of the COVID-19 pandemic. The US real estate market is no exception. Real estate transactions, mortgage qualification, home prices, mortgage rates, and more in real estate have felt the effects of the coronavirus. Many of them are negative, but there are silver linings here and there.

Below is information about how various sectors of the US real estate market may be affected by the coronavirus.

Home Sales Declining

According to Realtor.com in April, as most states began to close their economies down to fight the pandemic, real estate activity was curtailed in the short term (3-6 months) because people stopped listing homes. Also, open houses on new and existing homes were stopped or shifted to virtual channels only.

The mid-term impact (6-18 months) will likely be affected by lower buyer and seller sentiment, ongoing disruptions to the new and existing supply of homes for sale, and declines in affordability from job and income loss that affects consumers.

Realtor.com also reported for the last week of March, home sales were down 30% year-over-year in a sample of 106 counties across the six largest states.

Also, Realtor.com reported there could be two post-COVID-19 home sales scenarios:

  • V-shaped scenario (deeper contraction, faster recovery): Home sales would drop sharply in 2020 during Q2 and recover in the summer, fall, and end of the year.
  • U-shaped scenario (extended contraction): Home sales drop steadily in 2020 with declines in Q2 extending into Q3, then slowly recovering through the end of the year.

Home Prices Expected to Decline

Bank of America reports there will be lower home prices after the pandemic because of lower household incomes. While the Payroll Protection Program and the CARES Act will somewhat soften the economic blow to the US housing market, Bank of America predicts the lower end of the housing market will see the biggest decline in prices as the travel, energy, and hospitality industries are hit with the economic fallout of the outbreak.

Before the pandemic, Bank of America predicted that US home prices would rise 4-5% in 2020. But now it predicts home prices will drop until they hit bottom in April 2021.

Lower home prices hit homeowners in the pocketbook, but some homes being more affordable in the long term could aid the housing market recovery.

Past-Due Mortgages At Record Highs

As of the end of April 2020, a staggering 20.5 million Americans lost their jobs in only four to six weeks. This was the direst plunge in payrolls since the Great Depression. Unemployment as of early May stands at more than 15% in the United States. More than 26 million Americans have applied for unemployment benefits in the last 60 days alone.

As the pandemic caused millions of people to lose their jobs or hours, mortgage lenders began to tighten their qualification standards. Worries are running rampant in the mortgage markets that unheard-of unemployment numbers may translate to millions of mortgage defaults and late payments.

This is a real worry. As of late April, more than 6% of US mortgages were in forbearance, meaning they were at least 30 days late on payments. Financial data firm Black Knight reported that 6.4% of all US home loans, approximately 3.4 million loans, have been given payment delays by banks and lenders.

Approximately 1.5 million mortgages backed by Fannie Mae and Freddie Mac are in forbearance, which is about 5.6% of their total home loans. Approximately 1 million VA and FHA-backed loans, or 9%, are in forbearance.

Forbearance plans allow homeowners to delay their payments for up to a year if they have had financial strain caused by COVID-19. These plans allow borrowers to defer payments without late fees or damage to their credit. But interest accrues on the loan, and all missed payments must be paid in a lump sum at the end of the forbearance period.

Forbearance could prevent some Americans from losing their homes, but they will need to make up the payments eventually. The fact that so many Americans are behind on their home loans means lenders will be more cautious about issuing home loans for the foreseeable future.

Mortgage Qualification Tougher

A credit score as low as 580 could have been enough to qualify for many mortgages in early 2020. But most borrowers need at least a 660 FICO score today for the same mortgage loan. Further, some mortgage experts report it is almost impossible to do an FHA loan with a credit score below 660 right now.

Borrowers may need to have at least a 740 credit score to do a cash-out refinance for conventional loans. Conventional loans are usually for borrowers with higher FICO scores and have more cash to put down. Borrowers frequently use FHA loans when they have lower FICO scores and less money to put down.

FHA guidelines for issuing loans have not changed; it technically is possible to get a loan with a 580 credit score and only 3.5% down. But many FHA-backed lenders are being pressured by their investors to restrict loans to people who are the most creditworthy.

More information on tighter mortgage lending standards from major banks:

  • Bank of America has raised its credit score requirement from 660 to 720 for home equity loan borrowing.
  • JPMorgan Chase requires a score of 700 or higher and 20% down for most new home loans.
  • Flagstar, the 10th largest lender in the US, raised its minimum credit score for FHA, VA, and USDA loans to 680. For cash-out refinances, the minimum score is 700.
  • United Wholesale Mortgage and Wells Fargo are increasing reserve requirements for self-employed borrowers.

Lenders are paying attention to more than FICO scores. Lenders usually verify employment approximately 10 days before a loan closes. Some are now verifying employment on closing day because of the massive job loss problem.

Tougher lending standards is one of the reasons that mortgage applications are declining. Mortgage Bankers Association found that mortgage purchase applications were down 11%  from the week before for the week ending March 27, and down 24% from a year ago.

More rigorous lending standards will make it more difficult for people to buy homes and refinance for the foreseeable future.

Mortgage Rates Lower But Volatile

Mortgage rates showed considerable volatility at the end of March, with some mortgage lenders quoting a rate of 3.5% to 4.2% for a 30-year, fixed-rate loan. Inman.com reported that the average 30-year fixed-rate mortgage rate was 3.57% for Q1 2020. This compared to an average of 4.62% a year earlier.

More recently, mortgage rates were as low as 3.26% for a 30-year, fixed-rate loan as of May 7.

Rates are generally staying low in the current economic conditions because the Federal Reserve continues to buy mortgage-backed securities. This gives lenders the liquidity needed to offer more affordable loans.

However, the Fed’s policy on mortgage rates only applies to loans that are backed by the US government, such as Fannie, Freddie, FHA and VA-backed loans. Jumbo loans are not backed by the government and they are not nearly as widely available right now.

Summary

The US real estate market is taking a serious hit in the time of COVID-19, as all industries are. It is more difficult to get a mortgage, house prices are dropping, and millions are out of work, making it tougher for people to buy homes, and there will be a flurry of foreclosures at some point in the near future.

But on the positive side, interest rates are at record lows, lower home prices could help more home buyers jump into the market down the road, and history tells us the US housing market always recovers from serious headwinds.

The question at this point is, how long will it take before we see a strong real estate market in the US again? After the last crash, things did not return to a relative ‘normal’ for years. Here’s hoping the real estate market swoon this time will be short-lived.