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Will the U.S. Housing Market Experience a W-Shaped Recovery?

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Will the U.S. Housing Market Experience a W-Shaped Recovery?
4 min. read
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Image: R.M. Nunes / Shutterstock.com

Before the COVID-19 pandemic, the U.S. economy was in decent shape, including its housing market. But during the early stages of the outbreak, things started to waver and the health crisis began affecting the economy.

As governments worked to slow the spread of the virus, the U.S. housing market began to make a V-shaped recovery, which was good news. The rebound was based on four consecutive weeks of the highest levels of double-digit growth in purchase applications seen so far this year.

V-shaped recovery refers to the V shape on a chart that results from a quick bounce back after an economic decline. In a recession, the V-shaped revival is considered a best-case scenario, as it indicates rapid recovery from financial challenges.

But, with restrictions loosening and people getting more comfortable venturing out again, some regions of the U.S. are seeing an increase of COVID-19 cases, which means that the current V-shaped recovery in the country’s housing market could end up being a W-shaped one instead. This, of course, would entail increased pressure on the economy and, thus, a longer period of instability.

Logan Mohtashami, housing data analyst for HousingWire and financial writer, shared his thoughts on how the U.S. can avoid going into a W-shaped housing market recovery in the near future.

Preventing the W-Shape

According to Mohtashami, there are four things Americans must consider to prevent the regression of any progress made:

1) Flowing Credit

Credit needs to be flowing for a functioning housing market. Luckily, the government-run Freddie Mac and Fannie Mae have continued to provide credit for home purchases in what is otherwise a shaky economy.

Another safety net is the government forbearance plans, which help American homeowners who lost employment due to the pandemic. Without government backing, Freddie Mac and Fannie Mae would likely not have been able to offer mortgage deferment programs.

Thanks to the government involvement in these two lenders, the U.S. was able to weather the mortgage storm in March for the most part. That is apart from some instances in the jumbo market, the non-qualified mortgage market and for low FICO (Fair, Isaac and Company) score Federal Housing Administration loans.

2) Targeting 10-Year Yield Rates

Mortgage rates make up one area that appears to be little cause for concern, according to Mohtashami. This is because, for the foreseeable future, mortgage rates will likely be low or at least below 4.5% (which is the level that begins to affect demand).

However, Mohtashami says he would like to see higher yields for the 10-year yield (preferably above 0.62%), which would indicate an improving economy. According to Mohtashami, a yield range between -0.21% and 0.62% would indicate a recession, while anything over 0.62% would suggest that the bond market is confident in the future.

3) Having Flat to Positive Purchase Applications

Mohtashami believes it’s important for the U.S. to have flat to positive year-over-year growth in purchase applications for the rest of 2020. While the recent 18% and 21% year-over-year gains are encouraging, this growth rate is likely, not sustainable. It’s also best to focus on the year-over-year comparison rather than month-over-month comparisons.

At the beginning of the COVID-19 pandemic in the U.S., purchase applications were negative year-over-year by 11%, 24%, and 35% before recovering. Therefore, any growth in purchase applications compared to last year will be something to celebrate in the current situation.

4) Decreasing COVID-19 Cases

Mohtashami predicts that COVID-19 infection rates in the U.S. will be under control again by September 1, provided Americans do the necessary testing and follow recommended restrictions. This will be important to help the country prepare for a second wave that could hit in the winter months.

However, if things are not under control by September, the housing market revival could be significantly impacted through tightened credit availability and decreased purchase applications, possibly leading to a W-shaped recovery.

How Would a W-Shaped Recovery Look Like?

With America’s strong demographics and low interest rates, housing demand is usually a sure thing. But if COVID-19 fears prevent sellers from putting their homes on the market and buyers from looking at properties, this demand is at risk.

Another concern is the increase in the St. Louis Financial Stress Index to 0.21%, which indicates markets are losing confidence in the U.S. economy. This could mean more tightening of credit.

According to Mohtashami, it would be best for the index to go back to zero or negative to show the country is in recovery mode. Anything above 1.21% means it could continue to rise quickly.

Luckily enough, it’s possible for the U.S. to combat these concerns with its lack of a consumer credit bubble, low inflation and good demographics, alongside its strong workforce – 133 million Americans still working despite the pandemic-related shutdown.

Professionals in the real estate industry can also contribute to the country’s efforts to avoid a W-shaped housing market recovery. They can do so by following safe practices when showing homes and handling transactions, and letting potential buyers and sellers know the industry is doing everything it can to mitigate risks.

Source: HousingWire

 

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