Key Highlights

Market forecasters say home price drops likely if federal response to pandemic waivers

  • Since March, home sales have lagged but home prices have increased
  • Belated home price decline could result from prolonged economic damage and government’s uncertainty over policies that have kept housing markets afloat

We’ve all “noticed” that home prices have continued to rise these last four-five months in the midst of the COVID economic fallout and contracting sales volume as the pandemic continues to surge. Now that the federal government is waivering on longer-term relief extensions and policies to keep individuals/small businesses and eviction moratoriums afloat, many housing experts are concerned home prices could substantially drop.

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The Federal Reserve’s actions are not at issue here. Its actions to extend near-zero interest rates and enable mortgage forbearance for upwards of 4M homeowners have both enticed prospective homebuyers to buy and allowed homeowners negatively impacted by income/job losses to stay in their homes.

The federal government’s reactions are another story. As of this writing, the two houses of Congress are divided on whether or not to extend the CARES Act unemployment benefits and bonuses and for how long. (Currently, the Senate has proposed a drop to $200/week from $600/week in unemployment benefit bonuses but it looks as though that dollar amount could be negotiated up to $400/week.) That now past-tense CARES Act $600/week unemployment benefit bonus and mortgage forbearance policy have, without a doubt, kept the bottom from falling out of the housing market and prevented a wave of foreclosures across the country during Q2 and the first third of Q3.

Certainly, a foreclosure crisis (as well as a homelessness crisis) could be a reality without the formerly enhanced unemployment benefits and forbearance option. As of June, 21% of the 4.5M homeowners in forbearance were current on their mortgage payments but as the pandemic continues, more homeowners will likely enter into serious delinquency…and then foreclosure.

A sudden surge in supply caused by foreclosure could easily exceed demand to the point that prices could plummet as they did in 2008. But this time around, the number of potential foreclosures in late summer and fall may well make the 2008 crisis look like a walk in the park particularly in places hardest hit by the pandemic…cities in Florida, the Northeast, California, Texas, Las Vegas and some cities in the South.

Ralph McLaughlin, an economist with Haus that forecast home prices dropping from -0.5% – -2.5% from October 2020 to July 2021, said, “The (government’s) policy component is going to be extremely important going forward. We haven’t seen prices fall just yet. However, there are going to be some signs here over the coming months as to whether or not those policies are going to have a lasting impact on housing prices to keep them up, or if there’s potentially going to be a downturn.”

CoreLogic has been at the front of the pack in predicting home prices to fall by -6.6% y/y by May 2021. Frank Nothaft, chief economist with CoreLogic, said, “When we look at the mortgage market in particular, we have a lot of concerns that we’re going to see a spike in delinquencies and foreclosure rates as we get into 2021.”

 

Thanks to CoreLogic, Haus, and Curbed.

Also read: Will $2.2T CARE Act Sustain Economy or Are Relief Provisions Even Barely Enough?, Zillow Predicts Home Prices to Fall -2-3% in 2020…Plus More, Podcast: Tim and Julie Harris Share Their Personal Path To Success (Not What You Expect)