A U.S. housing market crash looks inevitable as mortgages become harder to get and people have less money to spend due to the pandemic.
The U.S. housing market started the year on strong footing, but the economic downturn and social distancing caused by coronavirus threatens to derail the sector.
A housing market crisis is coming to the United States. Even if it doesn’t look anything like the previous one, it won’t make it any less painful. While there has been no rampant speculation or subprime mortgage fraud like in 2008, the housing market is overvalued. Home prices are now at 117% of their prior peak level in 2006.
The coronavirus pandemic will force many cash-strapped Americans to sell their homes, flooding the market with oversupply. The problem is there will be fewer buyers as people have less money to spend.
Last month, the National Association of Realtors said home sales could drop about 10% in the short term compared to historical sales for this time of year. A March Federal Reserve consumer survey indicated that house prices are expected to increase 1.32% over the year. That’s the lowest since the survey began in 2013.
The preliminary University of Michigan consumer sentiment index for April showed plans to buy a home fell the most since 1979. Buying a home is not a priority for people who lost their job and have less money to spend.
We have seen dramatic and unexpected job losses associated with the shutdown of much of the U.S. economy. During the week ending March 27, a record number of 6.6 million Americans claimed unemployment benefits, bringing the three-week total to nearly 17 million.
People who lose their job won’t be in the market for a home.
Mortgage rates have dropped to a 30-year low, which should encourage home buying. Unfortunately, mortgage loans are now harder to obtain, which will impact the housing market.
Bill Banfield, executive vice president of capital markets for Detroit-based Quicken Loans, said:
For people who are unemployed, it’s going to be more difficult to qualify for a mortgage at this time. The ability to repay debt is based on the person’s income.
JPMorgan Chase, one of the country’s largest mortgage lenders, has changed its minimum lending standards. Nearly all mortgage applicants will need a minimum FICO credit score of 700 and will have to make at least a down payment of at least 20% to buy a home.
Amy Bonitatibus, chief marketing officer for JPMorgan Chase’s home lending business, told Reuters:
Due to the economic uncertainty, we are making temporary changes that will allow us to more closely focus on serving our existing customers.
Those stricter lending criteria will make it harder to buy a home.
Mortgage applications to buy a home dropped for the fifth consecutive week, down 2% from the previous week and 35% from a year ago.
The residential mortgage market is already under pressure after requests from borrowers to delay mortgage payments increased by 1,900% in the second half of March, according to the Mortgage Bankers Association.
Give the hardships that so many Americans are facing, it’s impossible to quantify how they will perceive home ownership post-pandemic. If Americans become more frugal as they did after the Great Recession, home buying will likely decline. As affordability collapses with fewer eligible buyers to buy a house, home prices will need to go down to attract buyers.