Housing Forecast Suggests ‘W’ Trajectory Is Likely

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According to a revised 2020 housing forecast from realtor.com, pent-up buyer demand and low interest rates will cause home sales in the U.S. to rebound in late summer and early fall before experiencing a downturn again later in the year.

The updated forecast also finds that despite an uptick in transactions during the third quarter – largely driven by millennials – home sales will be down 15% year-over-year, and home prices will flatten nationally as demand shifts to the secondary markets, which offer buyers more affordability and space.

The path forward for home sales will resemble a W shape, with homes sales rebounding in July, August, and September as fears of the coronavirus taper off and buyers return to the market to make up for the lost spring home-buying season before dipping again in the final months of the year as virus infections spike again and the lingering impact of the high unemployment rates are felt.

“The pandemic is leaving an imprint on the fabric of American life, culture, and preferences which we could see for years to come,” says Danielle Hale, realtor.com’s chief economist. “After experiencing life under quarantine, many buyers are searching for affordability and greater space, which is driving demand out of the nation’s largest metros and into surrounding smaller towns.”

The updated forecast projects mortgage rates to drop to new lows below 3% by the end of the year, primarily driven by an accommodating Fed and tepid economic outlook.

Although rates will be favorable, the qualifying criteria will be tougher than normal as lenders seek to mitigate their own risks amid the unfolding economic uncertainty globally. The stricter qualifying criteria will require buyers to have higher credit scores in addition to more cash for down payments. Shopping around for the best rates and terms will be particularly important over the next year.

And although qualifying for a loan will be more stringent, finding a home for sale will still remain the largest hurdle this year. The number of new homes for sale was down 45% year-over-year in April. However, with home prices expected to remain relatively stable, potential home buyers should have less competition from all-cash investment buyers, unlike during the 2008 recession, when they dominated the market.

The forecast points to the following market drivers:

  • Baby Boomers – Many Baby Boomers, who have already held onto properties longer than expected, may decide to postpone their home sale another year until things begin to normalize. This will further constrict the number of homes for sale. The Baby Boomer generation may see their share of home purchases dwindle in 2020 as members of the generation step back from the marketplace.
  • Millennials – Millennials will continue to be a dominant buying force in the market. Because millennials are making home purchases from a less discretionary perspective, they will continue to grow their share of home purchases. Millennials are projected to make up 50% of home purchases in 2020, but this number could grow if older generations decide to step back from the market.
  • Secondary Markets – Secondary markets throughout the U.S. with resilient jobs markets could see greater than normal demand as buyers continue to search for affordability and additional space. As these markets heat up, also expect to see a change to the mix of homes available for sale nationwide. As the mix of homes for sales shifts, we could see the national listing price decline to reflect the change towards more affordable homes.
  • Election – The 2020 presidential election will continue to be a wild card this year. Historically, economic strength is a good predictor of how people will vote.
  • Global Economy – The global economy will be key to watch this year. The U.S. is heavily dependent on imports and exports, so if the global economy is struggling, the U.S. will feel that impact. As the U.S. and the rest of the world continue to fight the COVID-19 pandemic, economic health here and abroad will be extremely important.
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