US housing set to ride out economic storm

Bengaluru, India

US HOME prices will defy the current economic downturn and ride out the storm, supported by record low mortgage rates and limited supply, said a Reuters poll that showed housing outpacing consumer price rises both this year and in 2021.

The US housing market, which was at the epicentre of the previous financial crisis that led to a global recession, is expected to remain a bright spot amid a sharp downturn as the novel coronavirus pandemic continues to wreak economic havoc.

The pandemic has infected more than 2.2 million people in the US, claiming around 120,000 lives. Infections are rising in many parts of the country.

According to the June 9-19 poll of over 40 housing strategists, house prices will rise 3 per cent this year and next.

Three months ago, they were expected to rise 3.4 per cent and 3.2 per cent respectively - so the forecast is remarkably stable, given that the economy is taking its worst hit on record and unemployment has soared to levels not seen since the Great Depression.

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"Housing demand is coming back in dramatic fashion, with homebuilders in markets all around the country reporting a bounce-back in demand in May and June," said Brad Hunter, the managing director at real estate advisory firm RCLCO.

"Price reductions will be mostly confined to the lower tranches of the market," he added.

These inflation-beating projections - the US Federal Reserve's own median projections expect consumer inflation of 0.8 per cent and 1.6 per cent this year and next - come with mortgage rates at record lows and a persistent undersupply of homes.

Housing demand, which is highly sensitive to mortgage rates, has steadily declined since last November. But the average 30-year mortgage rate hit a new low of 3.3 per cent this month, providing an impetus for buyers to lock in cheap borrowing rates.

Tight inventories that have underpinned the housing recovery since 2012 are expected to be squeezed further after construction came to a standstill when much of the US economy was closed for nearly two months to reduce the spread of the coronavirus.

Over 60 per cent of the analysts polled - or 21 out of 34 - said a return in US housing market activity to pre-Covid levels would be gradual.

Eight said the turnaround would be quick, two said it already had, and the remaining three said it would be slow and long.

Apart from weak activity, the main threat to the US housing market is unemployment, which jumped from record lows to record highs within a couple of months.

Nearly three-quarters of respondents, or 25 of 34, said high unemployment, currently at 13.3 per cent, was the biggest hurdle for the market over the coming year. Six cited a lack of supply of affordable homes, and three picked stringent lending policies.

"The only factor supporting the housing market really will be very low mortgage rates. But again, I don't think that will more than compensate for elevated unemployment and relatively weak consumer confidence," said Sal Guatieri, a senior economist at BMO Capital Markets.

Still, only a few analysts were expecting house prices to fall in 2020 - a stark difference from the 2008 crisis, when property values plummeted by more than a third.

"A disproportionate number of job losses were among the lower-paid sectors, so we should not see house prices fall as much as they did during the Great Recession," added Mr Guatieri, implying that most of the unemployed were not existing home-owners or looking to buy a home before the pandemic hit.

"We do anticipate a much more moderate decline in house prices, and that's simply because even though demand will remain relatively weak, supply has been weak as well," he said.

Even in a worst-case scenario, property prices were expected to drop only 1.2 per cent this year and 1 per cent in 2021.

Meanwhile, US home-mortgage delinquencies climbed in May to the highest level since November 2011, as the pandemic's toll on personal finances deepened.

The number of borrowers more than 30 days late swelled to 4.3 million, up 723,000 from the previous month, said property information service Black Knight. More than 8 per cent of all US mortgages were past due or in foreclosure.

The increase in delinquencies was smaller than the 1.6 million jump in April, when the economy ground to a halt nationwide.

Still, the path ahead is clouded by the spread of new Covid-19 cases, uncertainty over business reopenings, and the looming expiration of benefits that have helped jobless home-owners avert delinquency.

About 20.5 million Americans filed continuing claims for unemployment benefits in the first week of June, US Labor Department figures show.

The delinquency count includes homeowners who missed payments as part of forbearance agreements, which allow an initial six-month reprieve without penalty.

Many of those borrowers initially made payments despite qualifying for the relief plans - a share that has diminished as the crisis lingers.

Only 15 per cent of homeowners in forbearance made payments as at June 15, down from 28 per cent in May and 46 per cent in April. REUTERS, BLOOMBERG