Real estate professionals everywhere are on edge, wondering how the housing market will survive during the coronavirus (COVID-19) pandemic, financial crash and recession. To best prepare for the months — and yes, years — ahead, let’s sketch out the shape of the market in 2020 and the two-to-three years to follow.
Zillow recently released its forecast for the housing market in the coming months, forecasting a V-shaped recession. The rationale behind this forecast is that during shelter-in-place and social distancing orders, home sales volume will fall. But once the pandemic is over, the economy will bounce back to work quickly and so will home sales.
While historical examples of past pandemics are few and far between — the last one to occur of the magnitude of COVID-19 was the 1918 Spanish Flu — they somewhat agree with Zillow’s analysis of a quick bounce back. In the instances of the Spanish flu and the less impactful (but still relevant) 2003 SARS outbreak, the results for both were brief economic downturns that turned around quickly once the pandemics passed.
However, there were other economic factors at play during those previous pandemics that aren’t present today. In 2003, the global economy was in the midst of an expansion, and that momentum helped local economies — specifically Hong Kong where the virus had the most economic impact — bounce back quickly once the pandemic subsided. Likewise, in 1918, the wartime economy had the U.S. unemployment rate at an historic low of just 1.4%-1.8% going into the pandemic.
In contrast, 2020’s economy was already on edge. Yes, the U.S. jobs market was fairly stable, with an average of 3.7% unemployed in 2019, according to the Bureau of Labor Statistics (BLS). Still, hiring had begun to slow in 2018-2019, with year-over-year job additions gradually declining. Here in California, the share of working-age population who were employed finally crested pre-2008 recession levels in 2019 after taking into account population gain.
With slowing growth, the Federal Reserve (the Fed) began decreasing interest rates in an effort to ease the economy into the next business recession, which was anticipated to arrive around mid-2020. This recession timing was confirmed by the yield spread, which went negative in mid-2019 for several months. When this figure dips below zero, it indicates a recession is likely to arrive 12 months later — in this case, mid-2020.
Thus, the economy was already heading toward a recession when the stock market crash hit in late-February 2020 and the economy ground to a halt. In other words, the underlying economy in 2020 was already on unstable ground. Throw a global pandemic and a financial crash on top and you get a recession of historic proportions.
Prepare for the bumpy road ahead
The 36 million people who filed unemployment claims in March and April will not be able to simply pick up where they left off once the economy re-opens.
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A business upturn is possible towards the end of 2020 — this is the upswing of the “V” that Zillow and others are expecting. If so, the upturn will be brief before another slump sets in. The coming months will resemble the 1980 recession, which was quickly followed by a second, steeper recession in 1981-1982.
The second slump may be prompted by a COVID-19 resurgence, to be followed by more shelter-in-place orders, if not official then at least in practice for many consumers. Or, the second slump may be caused by a surge in bankruptcies and foreclosures. A combination of both factors is also likely, which will cause the second downturn to be worse than the first.
The current grace period for most mortgage forbearance programs is through the end of 2020. For renters, the grace period for missing rent without being evicted varies based on their local jurisdiction. In California, this ranges from the end of May (a statewide order) to up to a year after the end of the declaration of emergency (for cities like Los Angeles).
But once these extended grace periods are up, what then? It’s possible that homeowners unable to pick up their mortgage payments and renters unable to pay their landlords the back-rent owed will face foreclosure and eviction in the latter half of 2020 and continuing in 2021.
Government intervention can dampen the recession impact
The extent of the coming wave of bankruptcies and foreclosures may be tempered by government intervention. For example, if the government chooses to fulfill its role as the employer of last resort and put people back to work (at, say, infrastructure improvements the likes of that seen during the Great Depression), more individuals will be able to work and more will be able to pay their rent and mortgages. With consumers employed, more money will continue to circulate in the economy and fewer business failures and bankruptcies will occur.
And yet, medical experts agree that COVID-19 isn’t just going to “go away.” In a recent interview, Fed Chair Jerome Powell said the virus will continue to hamper the economy beyond 2020.
This is the main reason the economy won’t just bounce back later this year. It is likely to see some improvement from the current state of affairs, which sees unemployment rising rapidly and millions unable to make housing payments. The Fed currently projects the unemployment rate will reach 20%-25% this year. But the true recovery won’t occur until a vaccine is deployed and businesses have a chance to gain recovery momentum.
first tuesday forecasts the economy will show solid growth across all major sectors by 2023. Until that time, we will see some ups and downs as businesses and households struggle to adjust to COVID-19 norms and restrictions.
In the interim, real estate professionals can expect an adjustment in homebuyer and seller behavior. Anticipate an uptick in distressed sales in 2021 by researching local foreclosure and short sale rules as well as investment strategies for these types of sales. Prepare for reduced sales volume in the coming years by saving whenever possible and increasing marketing efforts to boost transaction volume.
Real estate agents and brokers who plan to survive the continued slowdown will need to be proactive. Strategize how you will continue to be successful in California’s shifting economic environment today.
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