While we won’t have official data until later this month, it is clear that the nation is in an economic recession. It is too early to tell how long the recession will last or how severe the economic impacts will be. In the short term, however, we know that this recession is different from the 2008 recession in many key ways. One important distinction is how the housing market likely will fare this time around compared to the last recession.
Unlike today’s recession, which is being driven by a global health pandemic, the 2008 recession was one directly tied to the mortgage industry and housing market. Prices had reached levels that were not supported by economic fundamentals and many homeowners had gotten into subprime loans with zero down payments, zero interest, and balloon payments. In addition, as the 2008 downturn began, the supply of new housing had outpaced demand, creating an oversupply in some markets. A wave of foreclosures increased that supply imbalance.
In 2020, mortgage lending has become much more conservative with stricter debt-to-income ratios and elimination of no doc/low doc loans and other subprime practices. Inventories of existing homes and construction of new homes are still far below what is needed to meet demand. Therefore, current home prices reflect supply and demand fundamentals, and not a bubble in the market.
However, as a result of COVID-19 and the recession, home sales in Virginia (and across the country) will be very slow this spring. There are some local markets where the numbers of closed sales in March were higher than they were last year, but the most recent data on new listings and withdrawn listings make it clear that the pace of transactions activity will slow.
If the measures being taken to slow the spread of the COVID-19 are successful, and if the Federal economic stimulus measures are put into place efficiently and effectively, it is possible that the housing market will rebound strongly in the second half of 2020, with spring and summer sales being pushed into the fall.
If the public health and economic recovery are slower, we could face significant job losses which could have a more prolonged impact on the housing market. This could mean a significant slowdown in transactions throughout 2020, as some potential homebuyers face unemployment and even more face financial uncertainty.
However, there is little evidence to suggest that home values will drop significantly, even in the slower recovery scenario. The factors shaping the demand for homeownership—in particular, the aging of the large Millennial population into prime homebuying years—will still be in place in the months to come. Household growth will continue to outpace new housing supply. As a result, there will be no price nosedive like that which we saw during the 2008 downturn.
More information on housing market impacts of COVID-19 are available on the Virginia REALTORS® COVID-19 Resources site.