The U.S. real estate industry is bracing for the most severe downturn since the 2008 financial crisis. In its first quarter 2020 report released this week, the government-sponsored enterprise Freddie Mac (Federal Home Loan Mortgage Corporation) warned that the housing market faces “considerable challenges amid economic uncertainty” due to the coronavirus pandemic and the government's shutdown of the economy. Simultaneously, the NAHB/Wells Fargo Housing Market Index (HMI), widely regarded as the pulse of U.S. homebuilder sentiment, collapsed 58% in April—from 72 in March to 30—marking the largest single-month drop and the lowest level on record.
Freddie Mac: Spring Surge Unlikely
Freddie Mac's research team noted in the report that with much of the country under stay-at-home orders, housing markets are expected to deviate from their typical spring surge. The report forecasts mortgage rates will only fall to 3.1% by 2021, and it may take a year for the economy to recover. Home prices will decelerate, and home sales are expected to decline in 2020. Refinancing activity is expected to slow, and purchase originations will drop. To adapt to the COVID-19 environment, Freddie Mac and Fannie Mae are exploring alternative appraisal methods, including exterior-only inspection appraisals and remote “desktop appraisals.”
As of mid-April, over 22 million Americans were unemployed, a large number of homeowners cannot pay their mortgages, and many landlords are struggling because tenants cannot pay rent. Real estate agents are unable to conduct property showings, and potential buyers are reluctant to make purchases.
Homebuilder Sentiment Crashes to Historic Low
Economist Peter Schiff commented on the HMI plunge via Twitter: “Homebuilder sentiment was forecast to drop from 72 in March to 60 in April. Instead it collapsed to 30, its biggest drop and its lowest level ever. But as worried as homebuilders are, they are still too optimistic. Homebuilding as an industry will be largely gone for a long time.” Schiff also dismissed CNBC real estate correspondent Diana Olick’s claim that the housing market is strong and construction will come roaring back due to a shortage of homes. Schiff argued that shortage is about to become a huge surplus, as homes not previously for sale hit a market with few qualified buyers.
Banks Tighten Lending: 700 FICO and 20% Down
Despite receiving trillions of dollars from the Federal Reserve, U.S. megabanks have tightened lending standards. On April 13, JPMorgan Chase issued new lending guidelines requiring buyers to have a minimum FICO score of 700 and a 20% down payment. This has made home equity credit scarce and locked out many potential homebuyers.
In summary, Freddie Mac's report, the collapse of the HMI, and the tightening of bank credit all indicate that the U.S. housing market is facing the greatest risk of a downturn since the subprime mortgage crisis. Investors should closely monitor unemployment data and policy responses in the coming months.