Why House Prices Beat the Pandemic Odds
…And Why So Many Housing Economists Got It Wrong
by Brian Fluhr
One year ago, at the onset of the Coronavirus pandemic, housing economists were making dire predictions for the market. The demise of housing did not play out the way many anticipated for several reasons but foremost because strong economic housing fundamentals were already in place pre-pandemic.
These fundamentals included the durable credit of borrowers, balanced debt-to-income ratios, and reasonable loan-to-value ratios. Homeowners today can withstand the crosswinds of a temporary loss of income because many homeowners have a much healthier balance sheet than homeowners had during the Great Recession—by some estimates, $7 trillion in home equity across the country.
The equity well reportedly increased by 16.2% year over year in the fourth quarter of 2020. In that estimation, the equity gain was more than $1.5 trillion.
Federal policies enacted since the pandemic began helped provide additional stability. For instance, the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, injected relief. This included expanded unemployment benefits, foreclosure bans, and student loan forbearance. COVID-19 hardship forbearance was extended to those hit by the pandemic, which had a federally backed mortgage.
So why did so many economists predict a home price collapse as a result of the pandemic?
Anxiety ensuing from the wave of job losses that followed the shutdown is in part to blame.
The Jobs Impact
Ordinarily, widespread job loss is associated with housing insecurity. By the fourth quarter last year, figures from the Federal Reserve Bank of St. Louis showed that despite some improvement in the economy, “heightened unemployment and economic uncertainty could continue to affect the housing market through 2020 and beyond.” The bank referenced the 2007-09 financial crisis when foreclosures and tighter lending practices locked many out of homeownership for several years. “There are signs of these long-term effects again,” they added.
However, the types of jobs lost were highly concentrated among lower-to middle-income workers, heavily impacting individuals in the decimated service industry who are more likely to live in rental units. An April 2020 report from the National Bureau for Economic Research elucidates this point. It found that 37% of jobs in the U.S. can be performed entirely at home, establishing that these occupations tend to be higher paying than those that cannot be performed in a home setting. Additionally, these jobs “account for 46% of all U.S. wages.”
Veros Got It Right
High-profile observers of the housing economy predicted that the market would depreciate annually due to the pandemic, with forecasts of prices dropping 6.6% by the early part of 2021 in one instance and between 0.5 and 2.5% from October 2020 to July 2021 in another.
VeroFORECAST, however, predicted that the global pandemic would only have a brief impact on housing prices. After one uncertain quarter, Veros stood tall by predicting that programs and policies implemented in the wake of the Great Recession would lead the market to return to pre-pandemic levels very quickly.
At the close of the fourth quarter of 2019, predictions were buoyant over what was to come in 2020. In its Q4 2019 VeroFORECAST, the company predicted an average increase of nearly 4% by the fourth quarter of 2020. This projected increase was based on data from 332 Metropolitan Statistical Areas (MSAs). At the time of its release, in early January 2020, Eric Fox, Veros’s vice president of statistical and economic modeling, cited sound economic fundamentals, low interest rates, and strong levels of employment as indicators of moderate home-price appreciation “with very few geographic pockets of weakness.”
When data from the first quarter emerged in April 2020, Veros Real Estate Solutions projected that home price increases would pause for only one quarter. Home prices rebounded throughout the subsequent quarters of the year.
In Q1 2020, VeroFORECAST data indicated an average projected appreciation rate increase of on average 1.9% through the first quarter of 2021. During 2020, there were two notable, competing scenarios at play. On the one hand: historically, low-interest rates stimulate demand and increased prices. On the other: rapidly rising unemployment and quickly falling GDP, both of which were turbulent but did not faze the housing market for the whole year, as others had predicted. Veros correctly indicated that there would be only a mild home price depreciation at the start of the pandemic, with a return to normal appreciation rates later in the year and into 2021.
As such, in March 2020, Veros said that in the first quarter of 2020, prices would depreciate by 1.1%, then the real estate economy would recover, and by the first quarter of 2021, prices would return to pre-pandemic appreciation levels of about 1% per quarter. This forecast was in line with previous projections indicating positive average home price appreciation, despite pandemic-related economic uncertainty and unemployment, particularly in the leisure, hospitality, and tourism industries.
The themes that Veros would point to early on started to take shape in subsequent quarterly reports. “This quarter’s forecast indicates significant home price appreciation from what we just experienced in the first quarter of 2020,” Fox said in early July. “Despite the devastating economic, social and health impact resulting from COVID-19, the overall average annual appreciation rate increased to 3.5% vs. 1.9% from the annual forecasted rate last quarter.”
The return to house price increases presents a paradox: Despite the naysayer predictions, appreciation strengthened beyond the levels witnessed before COVID-19 curbed economic activity. One catalyst was what has been dubbed “COVID migration.” That is where those jobs that can be effectively performed at home take center stage. As soon as large tracts of the population realized that they could move their entire lives even significant distances from where they previously commuted to work, an exodus from key market areas started to occur. To be sure, the pandemic migration phenomenon is real.
Places such as Boise, Idaho, and Spokane, Washington, continued to see a pattern of rising prices throughout 2020 and into 2021, while many urban centers across California saw an exodus. Along with Seattle and New York City, California was an early COVID-19 hotspot in the U.S. As a result, homeowners were scattering to the suburbs and beyond. Based on an average annual sample of more than 2 million one-way moves, one report quoted U-Haul truck rentals up by an average of 18% year-over-year between March and August 2020, peaking at 72% in May 2020.
Fear of the virus in dense urban centers may have been one factor. Another appeared to be a quest for space to accommodate the emerging work-from-home culture. In the rural West, this phenomenon has led to these locales attracting the moniker “Zoom towns.” One survey identified that suburban and rural properties were supplanting a preference for urban homes from the pre- to post-pandemic eras. While the percentage of those scoping out urban dwellings decreased 18%, those drilling into suburban and rural offerings increased by 7% and 10%, respectively.
What to Expect Next
With indications that herd immunity could be achieved by the summer of 2021, widespread economic vitality looks set to kick off. On one hand, elevated household savings are poised to be put to use. On the other, jobs are set to return. The post-pandemic period is near, and the prognosis is bright: Home prices are expected to move steadily upward in 2021 as job creation is restored and vaccinations take hold around the country.
As Fox detailed in the most recent VeroFORECAST report in early April 2021 with data covering the twelve months between March 2021 and March 2022: “Market conditions again in 2021 will be heavily driven by continued low interest rates and changes in ‘working from anywhere’ practices that were influenced by the coronavirus pandemic. Once the global pandemic is largely behind us, interest rates will stabilize and rise to some degree—we expect the nationwide home price strength to soften and be replaced by regional pockets of strength driven by migration patterns.”
