The U.S. Housing Market Bubble Is Bursting as Sales Plunge

Posted in: Housing MarketOp-ed
March 29, 2020 4:00 PM UTC

Sales have started to plunge in the U.S. housing market as coronavirus triggers a historic surge in unemployment.

  • The U.S. housing market is in trouble as sales are heading south.
  • Massive unemployment is expected to derail price growth.
  • Key players are already pulling out.

U.S. real estate has enjoyed a terrific run over the past year as buyers poured into the market to take advantage of low mortgage rates. But it was a bubble that was waiting to burst as home price growth continued to outpace wage growth.

Source: Twitter

The novel coronavirus outbreak may have popped the U.S. housing bubble because of its economic fallout. Buyers are fleeing the market even though mortgage rates have sunk to record lows, and this could set off the next housing crisis.

Buyers are escaping the housing market

Real estate marketplace Zillow has suspended purchasing new homes on account of the COVID-19 outbreak. The company directly purchases homes from sellers in 24 markets through its Zillow Offers business arm. It resells them after making repairs.

Zillow CEO Rich Barton said in a press release:

Our top priority is ensuring the safety and health of our employees, customers, and partners. Given the concerns for public safety and rapid developments by governments that restrict local real estate activities, we determined it was prudent to pause our home buying to preserve our capital.

He also added that Zillow has reduced its “pace of acquiring homes over the past month.”

As it turns out, Zillow isn’t the only real estate player to have scaled down its buying activity. Redfin made a similar earlier move this month by temporarily halting the operations of the RedfinNow home resale business.

Redfin CEO Glenn Kelman sad in a blog that:

This week, home-buying demand took a big hit, with year-over-year growth dropping from nearly 27% in January and February to 1% growth over the past seven days. There has in fact been a 1% contraction in demand over the past three days.

Kelman added that Redfin’s website traffic growth has shrunk to the high-single digits this month as compared to 20% growth in January and February.

The bad news for the U.S. housing market is that these two companies aren’t the only ones calling for weak demand.

Capital Economics forecasts that home sales could drop 35% this spring as compared to the closing quarter of 2019. Home sales in the U.S. could plunge to their lowest in 29 years to an annualized rate of 4 million.

Steep challenges ahead

The novel coronavirus-induced unemployment will deal a severe blow to the U.S. housing market as buyers think twice before entering the market.

Unemployment claims soared to 3.3 million last week. That was nearly five times the previous record that was set nearly four decades ago.

The novel coronavirus-driven shutdown is expected to push the U.S. unemployment rate to 13% by May, which would exceed the 10% rate seen during the 2009 Great Recession.

What’s alarming is that unemployment claims surpassed the most grim-looking estimates. Goldman Sachs was predicting that a record 2.25 million people would file for initial unemployment claims last week.

The number of Americans who had filed for their first week of unemployment benefits stood at 281,000 in the week before. That was a 33% increase over the preceding week and the highest percentage jump seen since 1992.

Source: Twitter

Goldman Sachs’ estimates were based on the spike in layoffs across various businesses such as hotels, restaurants, airlines and sports.

This is bad news for the U.S. housing market as rising unemployment will put off buyers even if mortgage rates remain low. This could eventually lead to lower sales and force sellers to reduce prices, triggering the next U.S. housing market crisis.

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

This article was edited by Sam Bourgi.

Last modified: March 28, 2020 6:13 PM UTC

Harsh Chauhan @techjunk13

Harsh has been covering financial markets on CCN since 2019. He has also written for other reputed publications such as The Motley Fool, TheStreet, and Seeking Alpha, and gets regularly featured on Yahoo! Finance. Harsh is based out of Indore, India. You can follow him on Twitter @techjunk13 or email him at harsh.chauhan(at)outlook.com.

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