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Terrified Banks May Trigger an $11 Trillion U.S. Housing Market Crash

Last Updated September 23, 2020 1:55 PM
Harsh Chauhan
Last Updated September 23, 2020 1:55 PM
  • Banks are tightening mortgage lending standards.
  • The housing market is in trouble as cash-strapped Americans could flood the market.
  • A massive crash could erase trillions in home values in the coming months.

The National Association of Realtors (NAR) tried to paint an upbeat picture about the U.S. housing market despite plunging sales of both existing and new homes, pointing out that low mortgage rates will act as a pillar of support for home sales despite the economic impact of coronavirus.

us housing tweet
Source: Twitter 

But now it appears that even a low mortgage rate environment isn’t going to save the housing market from a potential crisis. That’s because banks such as Wells Fargo have decided to not accept any more new applications for home equity lines of credit (HELOCs), while others are tightening their lending standards to avoid potential defaulters.

Banks Tighten Credit Lines Amid Coronavirus Pandemic

On Thursday, Wells Fargo spokesman Tom Goyda wrote in an email  to CNBC:

Wells Fargo Home Lending will temporarily stop accepting applications for all new home equity lines of credit after April 30,” Goyda said in an emailed statement. The choice “reflects careful consideration of current market conditions and the uncertainty around the timing and scope of the anticipated economic recovery.

A HELOC is a type of loan that’s secured by the borrower’s home. It acts as a revolving line of credit that the homeowner can use to meet their expenses. Bank of America’s website points out that to be eligible for a HELOC , the amount of money the homeowner owes on their house should be less than the value of the property.

In simpler words, the homeowner should have positive equity in their house to qualify for a HELOC, which makes it a safe loan for the lender to offer. So, the fact that Wells Fargo has decided to temporarily stop accepting applications for HELOCs indicates that the bank isn’t convinced about the health of the housing market.

What’s more, Wells Fargo isn’t the only bank that has stopped offering HELOCs. JPMorgan made a similar move in mid-April , citing uncertain housing market conditions.

Amy Bonitatibus, the chief marketing officer for Chase Home Lending, told HousingWire:

Due to the economic uncertainty, we’re temporarily pausing new applications for home equity lines of credit.

These moves may create a big problem for the housing market and eventually trigger a crisis.

Bad Days Ahead for U.S. Housing Market

Now that consumers cannot use their homes to borrow money, some may be forced to put their houses on the market if they face a liquidity crunch. According to Bloomberg, there are over 9 million second homes in the U.S. that might not be financially feasible  for their owners in the current scenario.

Those owners may flood the market with supply if they decide to sell, and there may not be enough buyers available given the employment scenario.

The novel coronavirus pandemic has put millions of Americans out of a job. More than 30 million Americans have filed for initial unemployment claims over the past six weeks. With so many people out of a job, the housing market seems doomed as demand dries up.

NAR expects home sales to drop 14% in 2020, and prices could follow suit if people start putting their houses on the market at low prices to gain access to liquidity. At the same time, there may not be enough people available to lap up the houses that come into the market as banks have decided to tighten lending norms.

us housing tweet
Source: Twitter 

This means that potential borrowers may not be able to take advantage of low lending rates. Zillow economist Matthew Speakman shed some light  on this in a statement to MarketWatch:

While some borrowers could be quoted rates close to the lowest they’ve ever been, others either with less-than-excellent credit scores or seeking an atypical loan type — like jumbo or FHA loans — may be offered a much-higher rate.

MarketWatch adds that banks are concerned about borrowers losing their jobs after they get a mortgage, so they are becoming stingy with loan offerings.

Trillions on the Line

According to the S&P/Case-Shiller home price index, U.S. home values had crashed 35% from the middle of 2006 to the beginning of 2009 . As the novel coronavirus-induced recession is expected to be greater than the financial crisis of 2008, don’t be surprised to see the U.S. housing market get decimated on a much bigger scale.

Zillow data reveal that the combined value of residential homes in the U.S. stood at $33.6 trillion last year. If home prices crashed as they did between 2006 and 2009, the housing market may witness at least a third – or $11 trillion – of its value being wiped out in the not-too-distant future.

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