Before the coronavirus crisis, the housing market was strong. Naturally, there were concerns that it would be negatively affected by the drops in consumer confidence and economic activity. So far, this hasn't happened. The housing market has been surprisingly resilient.
Of course, the equation could change, if there's sustained economic weakness that could dent demand. However, even in this scenario, housing would remain one of the better-performing assets, simply because, supply is low, and new home building remains at low levels.
Coronavirus Strengthening Demand
Recent data for mortgage applications and permits are back to 90% of pre-pandemic levels. This is a good long-term sign for the economy since so many industries like construction are connected to the housing market. Also, mortgage rates are near record lows which boost affordability and will stay low for an extended period given Chair Powell's recent comments.
There are several factors behind the resilience in housing. Supply is at historical lows. Demand has been strong due to low rates and migration from cities to suburbs which has been accelerated by the coronavirus. Real estate platform Redfin (Nasdaq: RDFN) compiled commentary from its agents. One said, "that big migration we're all expecting, it's beginning to happen. People are now moving more to the interior."
The report also said that demand based on website traffic is 25% higher than before the pandemic. Homes are selling for an average of 3.3% above the asking price, and sellers are raising prices on their homes. There have also been reports of bidding wars in suburbs surrounding cities. It seems that many people who were thinking about buying a house and moving from the cities to the suburbs are taking action and moving up their timeline.
People choose to live in cities with smaller living spaces and higher costs to enjoy the people, culture, nightlife, and amenities. However, the coronavirus has taken away these benefits, and people's appreciation for lower costs, bigger space, and access to outdoors in the suburbs and rural areas have increased.
Fundamentals
Another factor in the strong housing market besides the surge in demand coupled with low supply is that so far, most job losses have come at the bottom-tier of the economy. Less than 10% of job losses have come from wage-earners who make more than the average income.
A longer-term factor is that household formation rates and homeownership are at historically, low levels. Both figures tend to be mean-reverting which means that strong demand could be a secular trend which would result in higher prices and new construction which would feedback into the economy.
Finally, the housing bubble caused so much damage in terms of sentiment and wealth destruction. There was barely any new construction due to excess supply and low demand over the past decade. In some ways, it's reminiscent of a commodity bubble in which a bursting bubble leads to underinvestment. The underinvestment leads to low supply which creates the conditions for the next boom when demand surges.