By Rishi Kulkarni
The COVID-19 pandemic has had significant repercussions for practically every component of the global economy. Unemployment and bankruptcies have been on the rise as economists and business leaders alike maintain a negative outlook for the future. Despite formidable challenges and obstacles, the residential housing market has done exceedingly well. Factors including the increasing popularity of work-from-home, a low interest rate environment, and inventory issues going back decades, may be able to shed some light on the housing trends we see today.
The shift to work-from-home following the arrival of the pandemic was rapid and detrimental to city real estate markets. New York City and San Francisco property prices have sunk as thousands of residents move to cheaper, more comfortable homes in suburbia. Who can blame them? For some, it seems irrational to shoulder the inconveniences and expenses of city real estate when their standard of living could be greatly improved absent any additional outlay, especially as people are spending more time at home than ever before. The effects are clear – the volume of mortgage applications in September was 25% higher relative to the same time last year (DeSanctis). Furthermore, the work-from-home trend is almost certainly here to stay. A survey from 451 Research LLC found that 67% of respondents expect work-from-home to be extended permanently or at least for the long term; well-known companies such as Twitter, Microsoft, Square, and Dropbox have announced plans for permanent work-from-home options (Kaplan). For this reason, commercial real estate and metro markets are likely to continue to experience depressed prices and low demand following the pandemic. Housing markets outside major cities, however, have experienced higher demand. As a result, the Freddie Mac Housing Price Index (HPI) is at an all-time high. This trend in increased demand is bound to continue in the long term. Meanwhile, the interest rate environment has helped to stimulate activity in the short term.
Enticed by cheap rates, home buyers are jumping at the opportunity to buy new houses: the 30-year mortgage rate is hovering at an all-time low of around 2.8%. Lower rates mean that home buyers do not have to pay as much interest on the loan, which could make the overall purchase less expensive. However, prices have risen more than enough to overtake the savings provided by lower interest rates. In reality, buyers are not getting that great of a deal – they are paying more for houses than they were pre-pandemic. Yet buyers are still snatching up houses and exacerbating the inventory shortage that has plagued the country for decades. If houses continue to sell at this rate, we could face an inventory shortage in only a few months (Borden). Interest rates will likely increase post-pandemic, creating an incentive for homeowners to stay in their houses rather than move. Homeowners are also less likely to move back to cities in the future. Together, these factors will intensify the inventory shortage in the short and long term, resulting in a continued trend of increasing prices.
A shift to work-from-home coupled with a low interest rate environment has enabled the housing market to boom in the short-term. However, these factors have also raised concerns as to whether we are about to burst the housing bubble or experience a repeat of the 2007-09 crisis. First of all, there is little cause for concern when it comes to the reliability of the new mortgages that are being doled out. Lending standards have been tightened across the board, with Chase requiring 20% down and a 700+ credit score. Moreover, mortgage refinancing fees and restrictions have prevented many from taking advantage of lower rates. Although that is not necessarily a good thing, it does minimize the risk of default on new mortgages.
Delinquencies (missed payments) on mortgages insured by the Federal Housing Administration reversed a 10-year trend of decline and climbed to almost 24% in July (Jurow). This trend is worrying; the 2007-09 crisis was catalyzed by waves of delinquencies which turned into foreclosures. Today’s housing market, however, is not characterized by the risky, low-quality mortgages and extreme dependence on complicated financial derivatives that wreaked havoc on the global economy 12 years ago. For that reason, the market is not on the edge of a crisis. For now, the economic effects of the pandemic are the clearest cause of the recent increase in delinquencies: therefore, the question of whether we are experiencing yet another bubble can only be assessed following the pandemic, when we return to some semblance of normalcy.