The Housing Market Is Red Hot – But There’s Trouble on the Horizon

July 22, 2020 7:30 PM UTC
A record surge in home sales doesn't mean the housing market has escaped doom. Trouble is on the horizon as home prices keep rising.
  • Existing home sales jumped nearly 21% in June.
  • Low mortgage rates have driven homebuying demand.
  • Home prices are rising due to low supply, making homes less affordable.

While the rest of the U.S. economy isn’t recovering as fast as we would hope, the housing market is recovering sharply.

The Housing Market Is Red Hot

According to the National Association of Realtors, existing-home sales surged nearly 21% in June compared with May.

This is the highest monthly gain on record since the Realtors started tracking data in 1968. The increase came after home sales declined sharply over the previous three months due to the pandemic. Despite the big surge, sales were still 11.3% lower annually.

Mortgage rates fell below 3% for the first time earlier this month.

Average rates for 30-year mortgages fell to 2.98% on July 16, a new record low. | Source: Freddie Mac

Record-low mortgage rates have fueled homebuying demand. Mortgage applications to buy a home jump 2% last week and were 19% higher than a year ago. That’s the ninth straight week of annual gains.

Lawrence Yun, chief economist for NAR, said:

The housing market is hot, red hot, based on the data and the anecdotal prevalence of multiple offers. The urban area is less hot. We are clearly seeing trends for smaller towns or suburbs.

A record surge in home sales doesn’t mean the housing market has escaped doom. Home sales are based on closings. The latest data represent contracts signed at the end of April and May before much of the national economy began to reopen and before the latest outbreak of virus cases.

Home sales could start to fall if the virus surge prompts a second lockdown. Very few people are willing to buy a house without seeing it in real life.

Yun added:

Prices may not be damaged at all but the sales could. Virtual tours are only making up 7% of buyers.

Housing Is Less Affordable

Another concern for the housing market is rising prices. Home prices are rising due to high homebuying demand and low supply. The supply of available existing homes fell 18.2% annually to just 1.57 million homes for sale at the end of June. The inventory shortage is especially acute at lower price points.

The median price of an existing home sold in June was $295,300, up 3.5% from last year–the highest price on record. Even with low mortgage rates, such high prices make it difficult for low and middle-income workers to buy a house. Tighter lending criteria for mortgages don’t help.

Millennials who want to buy a home might have to delay their project. Many of them have lost their jobs during the pandemic, so they won’t be able to afford a house.

A third of Americans missed their July housing payments and may face eviction. Economics professor Richard Wolff has warned the pandemic could lead to a housing crash worse than the Great Depression.

Freddie Mac has warned that the rise in new virus cases is slowing the economic recovery and that this pause risks turning temporary layoffs into permanent job losses. High and persistent unemployment could hurt home buying.

The housing market is red hot for now, but as home supply keeps shrinking and prices keep rising, home sales should decline. Home prices are likely to fall first in major cities as Americans flee urban areas for the suburbs.

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

Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

@SBChateauneuf

Stephanie has been writing about stocks and financial markets for several years. Based in Canada, she has written for The Motley Fool and Seeking Alpha. She received an MBA in finance and worked for National Bank of Canada. Check out more of her experience on LinkedIn + and follow her on Twitter. Reach her at stephanie.chateauneuf (at) gmail.com or visit her profile on Muck Rack here. Stephanie is a Trusted Journalist.