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The Fed’s Housing Market Survey Has Never Looked This Bearish

Last Updated September 23, 2020 1:55 PM
Sam Bourgi
Last Updated September 23, 2020 1:55 PM
  • The Federal Reserve’s Survey of Consumer Expectations shows a deterioration in Americans’ view of the economy.
  • For the first time since the financial crisis, respondents expect home values to flat-line over the next year.
  • Listing prices are down across several major metro regions.

The Federal Reserve’s monthly survey of consumer expectations has painted a bleak picture for the U.S. housing market.

For the first time since the survey’s inception in 2013, the median respondent expects no increase in home prices over the next 12 months.

No Increase in Home Values Expected

The New York Fed’s April Survey of Consumer Expectations  highlights the damage coronavirus has inflicted on household sentiment.

For the first time, the median respondent expects home values to stagnate over the coming year.

Delving deeper into the data, 44.2% of respondents say they expect home prices to decline over the next 12 months.

Fed Consumer Sentiment survey
U.S. home values are expected to grow 0% over the next 12 months. | Chart: Fed Bank of New York 

In January, the median respondent expected home values to increase by 3.05% over the next year.

Sinking expectations go hand-in-hand with an increasingly bleak outlook on the U.S. economy post-coronavirus. In the Fed survey, respondents expressed a slightly more negative view on expected earnings growth and employment over the next 12 months. (We now know the U.S. economy shed 20.5 million jobs in April, the highest on record.)

Worst Is Yet to Come?

The U.S. economy is coming off its worst quarter since the Great Recession  due to the coronavirus pandemic, but economists say the worst is yet to come. Gross domestic product (GDP) could drop by as much as 34.9% between April and June, according to the Atlanta Fed’s latest estimate .

U.S. GDP contracted 4.8% annually in the first quarter:

All said, economic output could fall by 5% or more  this calendar year.

While home values don’t always reflect the economic cycle, the unprecedented collapse in GDP is likely to slam both supply and demand.

Declining demand doesn’t always mean home values are going to fall. (In Canada, housing sales plunged in March, but the average price ticked higher because of fewer listings .) But if demand declines and more properties flood the market due to adverse economic conditions for homeowners, prices could fall dramatically.

The first leg of the coronavirus lockdown impacted home values even as listings declined. The number of new properties on the market fell 36.9% annually in the final week of March and nearly 50% by mid-April, according to Redfin.

Over the same period, 26 of the 100 largest metro areas saw median listing prices decline between 0.1% and 3.3% .

Tighter Lending Conditions

In a further blow to the housing market, banks are becoming much more stringent in their lending standards. Major institutions like JP Morgan and Wells Fargo are increasing credit score and downpayment requirements significantly, making it harder to qualify for a mortgage.

It’s not difficult to see why. In addition to the record surge in unemployment, Americans added $155 billion of debt in the first quarter , bringing the total to $14.3 trillion. Mortgage balances accounted for $9.71 trillion of that total.

Banks are on high alert for potential defaults as employment is far less guaranteed than it was before the ‘coronacrisis.’

Household debt hit post-crisis levels long before Covid-19 was in the picture: 

With prices already falling in key markets, real estate could be heading for a hard landing in 2020. In this environment, the usual stimulus provided by near-record-low mortgage rates  won’t be enough to steer the market back on track.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.