Off-the-Charts Unemployment Stokes Fresh Fears of a Recession. Is a Housing Crash in the Cards?

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An unprecedented number of Americans lost their jobs in March as the coronavirus-driven crisis continued to escalate. That’s according to the latest unemployment numbers, which are inflaming fears that another recession has arrived and another housing crash may not be far behind.

About 6.6 million workers filed unemployment claims in the week ending March 28, according to seasonally adjusted U.S. Department of Labor data released on Thursday. That’s roughly double what was a record nearly 3.3 million claims filed the previous week. To put it another way, about 10 million people lost their jobs or income within a two-week span.

“The [jobless] numbers that we’re seeing are just not comparable to anything we’ve seen before,” says realtor.com Chief Economist Danielle Hale. “The longer it takes for business to resume, the harder it will take for the [economy] to bounce back.”

But while the job market has cratered and stocks are down substantially, it doesn’t seem like a similar crash is heading for the housing market. Unlike in the Great Recession, the housing and mortgage industries aren’t to blame for this latest downturn. And while the number of home sales is likely to take a beating, at least in the short term, experts predict that the real estate market is much more stable than it was in the last go-around.

Before COVID-19 devastated the world economy and financial markets, the U.S. had boasted a very low unemployment rate. The number of home sales was surging, along with real estate prices. New home construction was beginning to pick up. But this flood of layoffs as businesses have been forced to close, with many more on the way, has likely doubled February’s 3.5% unemployment rate, warns Hale. (The March unemployment numbers won’t capture the full extent of the damage, as the data won’t encompass the last two weeks of the month when the crisis reached epic proportions.)

Unemployment reached a historic peak at 10.8% in December 1982, according to the U.S. Bureau of Labor Statistics. (The data goes back only to 1948.) During the Great Recession, it reached as high as 10% in October 2009.

Hale fears if the pandemic drags on, unemployment rates could reach new heights. And naturally, that’s likely to hurt home sales.

“The scale of the decline is unlike anything we’ve seen before. Things were great, unemployment rates were near historic lows, we had fantastic numbers of jobs being added, construction was increasing, [and] home sales hit a 13-year high,” says Hale. “We’re going to go from almost record-low unemployment to record-high unemployment in a matter of months—which has never been seen before.”

Home sales are likely to fall—will prices follow?

With so many newly unemployed, a drop-off in home sales in the coming months is pretty much inevitable. Homes are already being pulled off the market as it becomes harder to execute sales and closings in a time of social distancing. And this could affect prices.

It won’t just be those who lost their jobs who put off home purchases.

“Buyers are thinking about income and job security today but also for the long run. They’re usually financing a home over 30 years,” says Hale. “If they feel the risk is there for them to lose their job, it may make them more hesitant to make a major purchase like buying a home.”

Fewer buyers doesn’t automatically mean that prices will fall to the levels they reached after the housing bust in the mid-2000s. Around the time of the Great Recession, there was an overabundance of homes for sale, thanks to overzealous builders who had put up more homes than there were buyers and an influx of foreclosures and short sales.

This time around, there is a severe shortage of homes on the market. And that could help to stabilize prices, preventing any plunges in value.

“If both sellers and buyers are hesitant to get into the market, you’re not going to see the massive buildup of inventory that forces prices down,” says Hale.

However, some real estate experts have predicted small declines until the pandemic is over. Ken H. Johnson, a real estate economist at Florida Atlantic University in Boca Raton, expects prices to drop between 5% and 10%—if that much.

“The homes that do sell will sell at a deep discount” during the height of the pandemic, he says.

Could the nation experience another foreclosure crisis?

Many are also worried that with roughly 10 million people out of work, the country could see another foreclosure crisis, with boarded-up houses and overgrown yards sprouting everywhere, as they did during and after the Great Recession.

But homeowners are getting help—the federal government has offered forbearance to those struggling to make their mortgage payments on Fannie Mae and Freddie Mac loans. Many banks are offering similar programs for nongovernment-backed loans. The Federal Housing Finance Agency also suspended foreclosures and evictions from single-family homes for 60 days on Fannie and Freddie loans.

Plus, today’s borrowers are in better financial shape, often with higher salaries and credit scores and less debt. These days it’s much harder for folks to get mortgages, with “liar loans” and subprime mortgages all but eliminated. Lenders are now required to more rigorously verify someone’s income instead of taking their word for it.

“What we have … are more financially qualified folks in homes than we did,” says Florida Atlantic University’s Johnson. “When the catastrophe hits this time, we will weather the storm much better.”

The federal government’s stimulus package, including the $1,200 checks sent to most Americans, small-business assistance, and beefed-up unemployment benefits, may help to mitigate the damage as well. So when the pandemic is under control and life begins going back to normal, the housing market could come back, says Lawrence Yun, chief economist of the National Association of Realtors®.

“Home sales will see significant declines followed by significant increases. It will be a wild swing,” says Yun. “I’m hoping the rebound can make up for the decline.”

But the outcome will all depend on how long it takes for the number of COVID-19 infections to fall, businesses to reopen and begin hiring again, and life to go back to some semblance of normality.

“It’s not a recession like any we’ve seen in recent history,” says realtor.com’s Hale.

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