How to Avoid V-Shaped Housing Market Recovery Becoming W-Shaped?

Key Highlights

• After four straight weeks of double-digit growth in purchase applications, higher COVID infection rates could turn market’s V-Shaped recovery into W-shaped recovery
• Four things needed to avoid V-shaped becoming W-shaped recovery

Logan Mohtashami, columnist with HousingWire, writes that the housing market was well on its way to actualizing a full V-shaped recovery in April and May. His premise? Double-digit growth in purchase applications for four consecutive weeks in May.

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Then, May rolled into June along with more relaxed stay-at-home restrictions and the COVID infection rates began to spike. Now those infection rate charts are spiking vertically and that most recent V-shaped recovery is beginning to take the shape of a W.

Now what? Mohtashami suggests in his most recent column that four things are needed to keep that V from actually becoming a W: flat to positive purchase applications, flowing credit, stable bond yields and control of the infection rates nationwide.

1. Flat to positive purchase applications:
   1. The current growth rate of purchase applications, 18%-21%y/y gains is unsustainable
   2. Mohtashami would be happy with any growth in purchase applications compared to last year.
2. Credit flow
   1. Luckily, Freddie Mac and Fannie Mae are still backed by government conservatorship so the credit pipeline for home purchases continues to flow in the midst of the COVID-economy’s craziness.
   2. Again luckily, the government forbearance programs have provided a backstop to workers now jobless. Instead of a complete meltdown in the mortgage market, we’ve seen just a few casualties in the non-qualified market, the jumbo market and low FICO score FHA loans.
3. Target 10-year yield rates
   4. In terms of mortgage rates, low or below 4.5% rates are expected to remain for a good chunk of time.
   5. If 10-year yield rate go lower than 0.62%, Mohtashami expects more economic chaos. He puts recessionary yield rates between -0.21% and 0.62%
4. Decrease in COVID-19 cases
   1. Mohtashami predicts infection rates to be under control before September ONLY IF much more testing is available along with common sense.
   2. We need to be ready for a second wave of infections to hit in the winter months.

Mohtashami reminds us that our “baked-in” demand for housing due to favorable demographics and low interest rates could go up in smoke if COVID rates remain uncontrolled and buyers/sellers become overwhelmed with fear. Fear= drop in purchase applications + tightening credit.

Mohtashami also reminds us that, due to favorable demographics and low interest rates, the US housing market is “…the single most outperforming economic sector in the world today.”

Thanks to HousingWire.

Also read: Summer Home Buying Ready to Take Off, Affordability Up +31% from One Year Ago, How About The Rise in Mortgage Applications!