Why the U.S. Housing Market May Be Even Weaker Than You Think

• Mortgage applications for home purchases jumped 11% last week.
• This measure of homebuyer demand has climbed for four straight weeks.
• This is a bullish indicator, but the outlook for the housing market might be darker than this metric suggests.

On the surface, conditions in the U.S. housing market appear to be looking up. Forbearance and delinquency rates may have spiked to alarming levels, but with unemployment piercing 20% in April, we knew this was coming.

Less certain was how the coronavirus pandemic would affect demand, and the data on that front continues to send the housing market some fiercely bullish signals.

Housing Market Demand Continues to Rebound Sharply

On Wednesday, the Mortgage Bankers Association (MBA) reported that its seasonally adjusted Purchase Index jumped 11% for the week ending May 8.

The Purchase Index tracks mortgage applications for home purchases (as opposed to refinances), making it a reliable way to evaluate how many people are shopping for a home.

Mortgage applications for home purchases have now climbed for four consecutive weeks following a sharp decline in March and early April.

Remarkably, today’s Purchase Index release shows that application volume is only 10% lower than the same week a year ago, despite the fact that most Americans were still under lockdown during the data collection period.

All this suggests that neither economic uncertainty nor skyrocketing unemployment has put a dent in homebuyer enthusiasm. Consumers who planned to purchase a home before the coronavirus pandemic haven’t changed their minds.

That’s the conclusion of Joel Kan, MBA’s associate vice president of economic and industry forecasting. Kan expects purchase applications to continue trending up as states roll back lockdown measures:

We expect this positive purchase trend to continue – at varying rates across the country – as states gradually loosen social distancing measures, and some of the pent-up demand for housing returns in what is typically the final weeks of the spring home buying season.

But this is also where the outlook for the housing market starts to grow a bit less rosy.

Why Homebuyer Demand Might Not Translate into Sales

Mortgage applications are a solid gauge of demand, but that demand only translates into sales if those applications get approved. And unfortunately for would-be homebuyers – and sellers too – it’s getting harder and harder to obtain a mortgage.

Banks and other lenders have steadily tightened credit restrictions throughout the pandemic. They’re afraid that the sudden economic downturn – which could be followed by a much more prolonged recovery – will trigger a cascade of defaults on debt payments.

Homebuyers aren’t the only consumers facing stricter standards. Credit cards and other loan products have also grown more difficult to obtain. But the fallout is particularly stark in the mortgage market, where interest rates are near record lows , and yet every loan carries more risk than it would have under “normal” conditions.

Available mortgage credit dove 16% in March , and then another 12.2% in April . According to the MBA, it entered May at its lowest level since December 2014.

Lenders have grown particularly leery of cash-out refinances , which allow borrowers to pull equity out of their homes. But lending standards have grown more restrictive throughout the mortgage market, with many banks hiking credit score and down payment requirements.

Many homebuyers who could have comfortably qualified for a loan just a few months ago could find themselves on the outside looking in the aftermath of coronavirus, even if their employment situation has not been affected by the crisis.

Consequently, the effects of the mortgage application rebound could be offset by the likely spike in application denials. This trend will persist until the broader economic recovery prompts lenders to loosen standards back to typical levels.

Will Bearish Home Price Predictions Stunt the Housing Market Recovery?

Of course, tightening credit restrictions aren’t the only headwind the housing market faces as it fights through the worst economic crisis since the Great Depression.

Another concerning statistic comes from the Federal Reserve Bank of New York’s April Survey of Consumer Expectations. For the first time ever, the median respondent said that they expect home prices to remain unchanged for the next 12 months. And nearly half – 44.2% – expect them to decline year-over-year.

That tracks with what economists are saying. A recent Zillow report estimated that home prices would likely fall between 2% and 4% in 2020 and gradually recover throughout 2021.

That could have a ripple effect on the supply of available homes, which has struggled throughout the pandemic. New listings have grown fewer, and many existing sellers have pulled homes off the market unsold.

Home price growth has already slowed to a crawl, so expectations of a looming decline could spur some anxious sellers to list their homes quickly – before the trendline reverses.

On the other hand, homeowners without a pressing need to sell their homes may decide to wait until price trends improve.

Brookings says that’s what happened during the Great Recession :

During the Great Recession, homeowners who could still afford to pay their mortgages and didn’t have to move for personal or professional reasons mostly generally didn’t list their homes for sale, anticipating lower sales prices.