One of the biggest unknowns facing the real estate sector is the long term impact of COVID-19 on the economy and housing market. George Ratiu, Senior Economist at joined an ALTA webinar sponsored by Qualia to discuss his projections for the year ahead. 

Ratiu covered the current environment, housing trends during the coronavirus, and housing market projections for 2020 and beyond.

The economic environment: high unemployment poses risk for millennials living on the financial edge 

“When you woke up on January 1st of this year, you would not expect that come June you would be looking at the economy and environment we have today,” Ratiu said. The US and global economic environment has changed dramatically in just a few short months.

Ratiu outlined a few economic indicators that could spell the future for the US and global economy. These included trends related to US and global gross domestic product (GDP), unemployment rates, and consumer spending. 

GDP trends point to significant global economic impact 

“Over half of global economic activity is concentrated in the US, China, and Euro area,” Ratiu noted. The pandemic hit all three of these regions hard. Ratiu predicts that the pandemic will cast a “long shadow” on the global economy as a result.

In the first quarter of 2020, the US saw a 5% decrease in GDP. This decline is the steepest since the great recession and driven by the final two weeks of the quarter when the coronavirus spurred local shutdowns. Because consumer spending drives more than half of the US economy, local shutdowns had an immediate impact in March. The shutdowns instantly halted consumer spending across tourism, leisure & hospitality, as well as brick and mortar retail. 

Unemployment rates at record high. Spillover effects yet to be determined 

Ratiu noted that current jobless claims reached a cumulative 13-week high at 46 million; however, the number of individuals still drawing from unemployment today is close to 21 million. Many Americans who were laid off found positions at new companies or shifted to work in new industries where hiring demand was high.

Ratiu said he is “keeping a close eye on employment.” While many Americans will get their jobs back when economies reopen, the “spillover effect” is still unknown. Ratiu elaborated that industries outside of those initially hit hardest by the pandemic are staring to “feel the pinch.”

Consumer spending 

One key area of concern is the economic security of Americans living on the financial edge. Ratiu pointed to a University of Chicago study which found that 30% of Americans could not afford to miss a single paycheck.

The US government responded to the economic shutdowns swiftly. Americans under a certain financial threshold received government stipends. However, in some states like California and New York where the cost of living is exponentially higher than other regions of the country, these checks were not enough to fill the gap.

Ratiu said that millennial homeownership—poised to hit its peak in the year ahead—may now be delayed by years. He noted that a single month of lost savings can take up to nine months for a typical millennial to recover. 

Ratiu pointed out that although many Americans may be financially strained, consumer savings have increased dramatically during COVID-19. Before the coronavirus, the average savings rate was steady at around 9%. Since the coronavirus, savings have spiked dramatically to over 30%. 

Graph from demonstrating rise in consumer savings during COVID-19

COVID housing market trends: inventory dropped while lenders raised requirements

Over the course of the coronavirus, active real estate listings have declined at an accelerated rate. Even before the coronavirus, inventory was low due to reduced mortgage rates which sparked demand. Ratiu predicts that at the current pace, 2020 will see a dip in home sales by about 15% due to the decline in inventory as well as other factors such as high unemployment rates and more restrictive mortgage lending criteria.

Graph from showing the available housing inventory dropping quickly during COVID-19

Ratiu noted that the decrease in listings is particularly acute in large metro areas and regions hit hardest by the pandemic. The 10 metros with the highest COVID-19 cases per capita are seeing new listings down by 69% year-over-year. In contrast, the 10 metros with the lowest cases per capita are seeing a 37% decrease in new listings year-over-year.

In addition to reduced inventory, lenders are also raising their credit and downpayment criteria to ensure borrowers can make their payments during the recession. Pre-COVID, the average minimum credit score was 680 with a minimum down payment between 5 and 10%. Now, lenders require a minimum 700-720 credit score with a minimum down payment of 20%. These new criteria may result in purchasing restrictions for millennials, a cohort that made up more than 50% of all housing activity this year. The average millennial FICO score is below 700. 

Despite these factors, Ratiu noted that as of the morning of the webinar (June 23, 2020) new home sales were on the incline over the past month. “Both month-over-month as well as year-over-year home sales are rebounding which is encouraging.” 

Housing market predictions: short-term rebound followed by a sustained recovery in 2021

In the year ahead, projections indicate a negative US GDP and unemployment levels at around 10%. These numbers are drastically more unfavorable than predictions at the beginning of 2020 which projected an expected GDP at 1.8% and unemployment at around 5%. 

Graph from showing the "w" shaped graph of housing purchase rates increasing during summer 2020 before falling during winter 2020 and then progressively recovering in 2021

Ratiu noted that while sales declined during COVID, he expects the housing market to follow a “W” shape recovery. The market will likely rebound this summer (which is already being seen); however, once winter hits, the market will see a relapse before a much stronger rebound in 2021.

Ratiu noted that there is pent up demand that will be released during the low-interest rate environment this summer. Ratiu is optimistic that the millennial market will help jump-start economic growth. “Over 50% of the US population is under the age of 50,” he said. Many of these individuals are approaching major life stages. “This spells tremendous potential for economic growth.”