Get used to hearing about the Flying W... no, it's not a UFO!
Nope... the Flying W not a UFO nor a variant of a famous truck stop with a name that ends in J...
We are talking about the housing market's recovery after the coronavirus crisis.
Ralph B. McLaughlin, Chief Economist and SVP of Analytics at Haus, recently wrote a very informative piece on how the company sees the prospects for recovery for the housing sector.
Specifically, Haus expects that the housing market recovery will likely take the form of a flying W, with an initial sharp drop this spring, a noticeable rebound in the summer followed by another dip in the fall, and finally, a stable road to recovery by spring 2021.
Think about it... \ / \ /
\ - an initial sharp drop this spring (we are right in the middle of it)
/ - a noticeable rebound in the summer (as people finally leave their homes and start normal activity)
\ - followed by another dip in the fall (this season is usually slower), and
/ - a stable road to recovery by spring 2021 (spring is high season for home shoppers).
There are many unknowns that may change this forecast but, in my view, the Flying W approach is a plausible outcome for residential real estate markets across the nation. Those unknowns include the impact of premature openings in certain regions, a potential second round with Covid-19 in the fall, and the effects of the upcoming November Presidential election. At the end of the day, however, I agree that we will see a W-type of recovery.
Mr. McLaughlin's article includes important notes that further explain Haus' forecast for the housing market. My comments are in red.
1. A smaller residential real estate market - Haus sees a reduction in both demand and supply that will lead to a reduction of home sales and purchase mortgage origination between about 38% and 45%, respectively, in the light scenario to 44% and 65% in the severe scenarios.
(I can see why many sellers will pull back while facing the threat of a deadly new virus. It's perfectly understandable. I can also see why many buyers will delay buying decisions at this time, especially with mounting job losses, economic hardship and increased lending requirements.)
2. If you don't sell, you refinance - Haus projects that refinance mortgage origination volume will actually spike over the coming months by about 157% to 175%.
(Many would-be sellers will delay their entry into the market during the pandemic. For those staying put, refinancing their loans at a lower interest rate will give them a lower monthly payment. Others may find the prospects of cashing out some of their equity very appealing.)
3. Single-Family housing permits also take the Flying W - As to new construction, Haus predicts that homebuilders will pull back on initiating new projects with a rebound by late summer, as local permitting offices reopen and homebuilders begin to push through a backlog of existing projects that were ready for permit applications. By the fall, Haus sees another sharp pullback of permits as homebuilders take a more cautious approach to breaking ground on new projects. The fill recovery finally begins in spring 2021 as the bulk of the economic impacts of the Covid-19 pandemic pass.
(I believe it's a safe bet to predict that homebuilder activity will, to an extent, mirror the housing sector as a whole. However, at least anecdotally, the appeal of new construction may be heightened by the Covid-19 crisis. You know... some people may be inclined to choose a new home with less germs than an existing property. This, along with higher buyer incentives and very low interest rates, may help homebuilders avoid a glut of inventory.)
4. Home prices are not going down significantly - Haus expects listing and median sales prices to dip slightly this spring. However, on a year-to-year basis, Haus anticipates a sharp cooldown of quality-adjusted prices to between 0% and 2.5% at their trough in late winter of 2021.
(In other words, those waiting for a 2008-style price drop will continue to wait... a 2.5% drop in quality adjusted prices should not be a motivator for those waiting on the sidelines.)
One last note on Mr. McLaughlin's article: The explanation as to why Haus does not expect national price declines is right on point. In my opinion, Haus gives us three powerful reasons as to why we won't see national price declines as a result of the Covid-19 crisis. Again, my commentary is in red.
(1) home prices are what economists call “downward sticky,” which means that when faced with taking a loss on the sale of a home or taking it off the market, home sellers will tend to the latter,
(The mindset of my sellers is: why sell if I don't have to? In their minds, it's better to wait, ride the crisis in their very own home, and once there is a sense of a new normal, then - and only then - sellers will sell for top dollar. Of course, in every market we always have motivated sellers and buyers, so those who need to sell and those who need to buy won't wait.)
(2) supply will fall roughly in line with, or even more than, demand over the next 12 months,
(This is a powerful thought. In 2008 and 2009 we saw homeowners dumping their properties in droves, thereby creating an imbalance between supply and demand. This time is different. Both supply and demand are coming down in general. I believe many markets - Central Florida included - will continue to see substantial demand for housing.)
and
(3) relief provided by the federal government in the form of mortgage forbearance, suspension, and deferral, combined with additional unemployment support and stimulus checks, will help keep financially distressed homeowners in their homes instead of having to foreclose or short sell. This will lead to much fewer distressed properties than during the Great Recession, and as such, very little downward pressure on home prices.
(The federal government and the real estate and lending industries have been proactive in light of the Covid-19 crisis. Yes, dealing with servicers is always difficult and stressful - look here for some tips - but there is a general sense of wanting to overcome the logistical challenges of loss mitigation, fueled by government guarantees to borrowers and servicers alike.)
So tell me, what do you think of the Flying W approach? As I see it, this looks like the right approach based on available information.
Share your thoughts connect and with me on LinkedIn, Facebook (English and Spanish) and Twitter!
Or, let's go old school and call me at (407) 443-3833.
We are talking about the housing market's recovery after the coronavirus crisis.
Ralph B. McLaughlin, Chief Economist and SVP of Analytics at Haus, recently wrote a very informative piece on how the company sees the prospects for recovery for the housing sector.
Specifically, Haus expects that the housing market recovery will likely take the form of a flying W, with an initial sharp drop this spring, a noticeable rebound in the summer followed by another dip in the fall, and finally, a stable road to recovery by spring 2021.
Think about it... \ / \ /
\ - an initial sharp drop this spring (we are right in the middle of it)
/ - a noticeable rebound in the summer (as people finally leave their homes and start normal activity)
\ - followed by another dip in the fall (this season is usually slower), and
/ - a stable road to recovery by spring 2021 (spring is high season for home shoppers).
There are many unknowns that may change this forecast but, in my view, the Flying W approach is a plausible outcome for residential real estate markets across the nation. Those unknowns include the impact of premature openings in certain regions, a potential second round with Covid-19 in the fall, and the effects of the upcoming November Presidential election. At the end of the day, however, I agree that we will see a W-type of recovery.
Mr. McLaughlin's article includes important notes that further explain Haus' forecast for the housing market. My comments are in red.
1. A smaller residential real estate market - Haus sees a reduction in both demand and supply that will lead to a reduction of home sales and purchase mortgage origination between about 38% and 45%, respectively, in the light scenario to 44% and 65% in the severe scenarios.
(I can see why many sellers will pull back while facing the threat of a deadly new virus. It's perfectly understandable. I can also see why many buyers will delay buying decisions at this time, especially with mounting job losses, economic hardship and increased lending requirements.)
2. If you don't sell, you refinance - Haus projects that refinance mortgage origination volume will actually spike over the coming months by about 157% to 175%.
(Many would-be sellers will delay their entry into the market during the pandemic. For those staying put, refinancing their loans at a lower interest rate will give them a lower monthly payment. Others may find the prospects of cashing out some of their equity very appealing.)
3. Single-Family housing permits also take the Flying W - As to new construction, Haus predicts that homebuilders will pull back on initiating new projects with a rebound by late summer, as local permitting offices reopen and homebuilders begin to push through a backlog of existing projects that were ready for permit applications. By the fall, Haus sees another sharp pullback of permits as homebuilders take a more cautious approach to breaking ground on new projects. The fill recovery finally begins in spring 2021 as the bulk of the economic impacts of the Covid-19 pandemic pass.
(I believe it's a safe bet to predict that homebuilder activity will, to an extent, mirror the housing sector as a whole. However, at least anecdotally, the appeal of new construction may be heightened by the Covid-19 crisis. You know... some people may be inclined to choose a new home with less germs than an existing property. This, along with higher buyer incentives and very low interest rates, may help homebuilders avoid a glut of inventory.)
4. Home prices are not going down significantly - Haus expects listing and median sales prices to dip slightly this spring. However, on a year-to-year basis, Haus anticipates a sharp cooldown of quality-adjusted prices to between 0% and 2.5% at their trough in late winter of 2021.
(In other words, those waiting for a 2008-style price drop will continue to wait... a 2.5% drop in quality adjusted prices should not be a motivator for those waiting on the sidelines.)
One last note on Mr. McLaughlin's article: The explanation as to why Haus does not expect national price declines is right on point. In my opinion, Haus gives us three powerful reasons as to why we won't see national price declines as a result of the Covid-19 crisis. Again, my commentary is in red.
(1) home prices are what economists call “downward sticky,” which means that when faced with taking a loss on the sale of a home or taking it off the market, home sellers will tend to the latter,
(The mindset of my sellers is: why sell if I don't have to? In their minds, it's better to wait, ride the crisis in their very own home, and once there is a sense of a new normal, then - and only then - sellers will sell for top dollar. Of course, in every market we always have motivated sellers and buyers, so those who need to sell and those who need to buy won't wait.)
(2) supply will fall roughly in line with, or even more than, demand over the next 12 months,
(This is a powerful thought. In 2008 and 2009 we saw homeowners dumping their properties in droves, thereby creating an imbalance between supply and demand. This time is different. Both supply and demand are coming down in general. I believe many markets - Central Florida included - will continue to see substantial demand for housing.)
and
(3) relief provided by the federal government in the form of mortgage forbearance, suspension, and deferral, combined with additional unemployment support and stimulus checks, will help keep financially distressed homeowners in their homes instead of having to foreclose or short sell. This will lead to much fewer distressed properties than during the Great Recession, and as such, very little downward pressure on home prices.
(The federal government and the real estate and lending industries have been proactive in light of the Covid-19 crisis. Yes, dealing with servicers is always difficult and stressful - look here for some tips - but there is a general sense of wanting to overcome the logistical challenges of loss mitigation, fueled by government guarantees to borrowers and servicers alike.)
So tell me, what do you think of the Flying W approach? As I see it, this looks like the right approach based on available information.
Share your thoughts connect and with me on LinkedIn, Facebook (English and Spanish) and Twitter!
Or, let's go old school and call me at (407) 443-3833.
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