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U.S. Housing Market Eyes a Terrifying Omen Across the Atlantic

Last Updated September 23, 2020 1:54 PM
Sam Bourgi
Last Updated September 23, 2020 1:54 PM
  • Zoopla estimates that more than 370,000 British home sales could stall due to coronavirus. Full-year sales could plunge 50% compared with 2019.
  • Due to rising household debt and a record surge in unemployment, the U.S. housing market risks a similar ‘stalling’ that could lead to more devastating consequences.
  • American per-capita household debt hit a new record high in March.

Coronavirus has pushed the U.K.’s housing market into a “period of suspended animation,” with one estimate calling for home sales to fall by half this year.

Across the Atlantic, similar forces are playing out as mounting debt and a historic surge in unemployment risk triggering a wave of defaults across critical segments of the U.S. housing market. A controversial plan to reopen the U.S. economy could prove insufficient as housing activity is likely to remain subdued indefinitely.

US housing market
A climate of anxiety continues to hover over the global housing market in the wake of the coronavirus pandemic. | Image: Frederic J. BROWN / AFP

U.K. Real Estate Takes a Beating

Demand for British real estate plunged 70% between March 1-29, as the country’s strict lockdown orders effectively put a freeze on home sales. The data, courtesy of search-listing website Zoopla , show that demand for housing bottomed in April–setting the stage for a gradual recovery.

browsing data, uk
Browsing for U.K. homes has plummeted in the wake of the coronavirus pandemic. | Image: Zoopla 

But gradual recovery is not the same as a full rebound. Zoopla estimates that demand is still 60% below the early-March levels. The firm believes completed home sales could drop 50% compared with 2020.

Richard Donnell, Zoopla’s director of research, said a housing recovery, “all depends upon how much the economy is impacted over the rest of the year and the impact on levels of unemployment.”

U.S. Housing Market: Climate of Anxiety

Britain’s housing market isn’t the only one buckling under the weight of government lockdown orders.

In the United States, home sales, housing starts, and builder confidence have plunged in the wake of the pandemic–undermining an already shaky recovery.

That’s because America’s real estate industry has been flashing warning signs long before coronavirus. Debt-laden consumers have relied heavily on declining mortgage rates to finance their next home. Like clockwork, sales activity has tracked the mortgage-rate cycle. When rates fall, sales rise. When rates rise, sales either drop off or stall indefinitely.

But with 26.4 million more Americans filing for unemployment benefits in the last five weeks , low mortgage rates won’t make housing more affordable for the average buyer. Add to that a new peak in household debt, and you have a recipe for disaster.

On Monday, Learn Bonds reported that per-capita household debt  in the U.S. hit $43,000 in March, a new all-time high. Household debt has been rising steadily since 2013. Over that stretch, per capita debt has skyrocketed 26.5%. All the while, average hourly earnings have barely kept up with the official inflation number.

us household debt
Mounting debt has been a staple of America’s post-2008 recovery. | Chart: learnbonds.com 

America’s debt burden has likely gone up in light of the government’s response to Covid-19. Although several states are planning to reopen business as soon as this week, the economic recovery could take years to play out. For workers currently on leave, this could mean permanent job loss or reduced hours as businesses ramp up slowly.

Peter Schiff, twitter
As Peter Schiff rightly notes, getting back to work is easier said than done for America’s shuttered businesses–and their workers. | Source: Twitter 

If unemployment persists indefinitely, the U.S. housing market may soon face a supply issue as well as the aforementioned demand crunch.

Under such a scenario, cash-strapped homeowners would be forced to sell their property, thereby flooding the market with new supply. An oversupplied market would put a firm cap on price growth, which is expected to slow this year to the lowest level since at least 2013.