After a record-setting 2019, the US economy started off 2020 with another strong job market. In January, job gains beat expectations, wages grew above 3%, and unemployment rates remained at or near historic lows. Unfortunately, all of this changed after the COVID-19 pandemic and the subsequent economic downturn.
As businesses across the country have been mandated to close their doors to slow the spread of the coronavirus, people have been losing their jobs left and right. According to the US Department of Labor, a record 6.9 million Americans filed for unemployment benefits in the last week of March alone. While claims have fallen each of the last four weeks (a sign that at least things aren’t getting worse), millions of Americans still file for unemployment as the coronavirus crisis continued to weigh on the US economy. First-time claims for unemployment benefits were 3.8 million in the week ending April 25th. This brings the total number of first-time claims over the past six weeks to 30.3 million. This represents roughly 18.6% of the US labor force, according to the US Department of Labor.
Source: US Department of Labor
Needless to say, joblessness remains a dire problem in the United States. This economic effect of the coronavirus is triggering a rise in the unemployment rate and a drop in income for many. As a result, economists believe that the US housing market 2020 is also expected to take a hit. After all, job security, rising wages, and low unemployment rates were the forces that repaired the real estate market after suffering its largest housing bubble and crash a decade earlier. Thus, changes in these trends will naturally lead to changes in the housing market as well. How exactly? Keep reading as we explain how high unemployment will affect the US real estate market.
Unemployment Effect on US Home Sales
We can see the biggest COVID-19 impact on real estate in 2020 home sales. Exerts were quick to point that one of the housing market predictions to expect for this year is slowing home sales. When it comes to how many people will buy homes, experts say the job market actually serves as the determining factor of the market’s ultimate success or failure. In February, US home sales had soared which reflected the excellent labor market of the past three years. But as the coronavirus closures are now keeping buyers and sellers socially distant, we’re seeing a sharp reverse.
Seeing that there are simply fewer buyers and sellers in the market and the fact that it’s hard to close a real estate transaction remotely, it’s no surprise that sales will slow down. Those who have lost their jobs are unlikely to buy a home any time soon. Even those who haven’t been laid off are likely to hold off on such a major purchase, fearing for the stability of their employment. And while wealthy buyers may be shielded from the economic downturn, they may still balk at the idea of plunking down millions of dollars on a property they can’t even walk through. In other words, high unemployment = lower expected future income = lower demand for housing.
As a result of this lack of demand for housing, many sellers are pulling their properties off the market. Data from Redfin show a nearly 150% jump YOY in the number of listed homes being taken off the market in the last week of March. Housing inventory across the country was already weak, down 10% YOY in February with an average supply dropping to 3.1 months from 3.6%. Moreover, experts forecast existing home sales (which make up about 90% of the US housing market) to drop 8.1%. This is the largest one month decline since November 2015.
However, experts also remind us that while unemployment has already skyrocketed, it’s not yet clear how many of those job losses will be permanent. “The big question is how high unemployment ultimately goes and how much the income and savings and confidence of people get hammered over the next couple of months,” said Jeff Tucker, an economist at Zillow. Experts also point out that while the effect of the coronavirus on the housing market is hard to forecast, a lot depends on how deep the coronavirus recession goes and how long it lasts. If the job market does not fall apart, many are optimistic that the real estate market will rebound when COVID-19 is under control.
Related: The Future of Real Estate Investing After the Pandemic
Unemployment Effect on Rental Rates
As with most economic downturns, people who don’t have sustained savings are the ones who will hurt the most. And typically, those people are renters. A lot of industries that have been laying off workers are those where a share of workers are renters. Also, renters often spend a larger share of their income on housing and have fewer savings set aside to ride out a crisis. This is why tenants of rental properties represent the most vulnerable group to the immediate effect of the coronavirus pandemic. This tells us that high unemployment is not only affecting the housing market 2020 but the rental market as well.
Nearly 10% of renters didn’t pay in April compared with 5% during a typical month. Some industry experts expect May to be even worse. As a result, landlords of rental properties are now worried about maintaining rental income and cash flow in the coming months. However, federal and state eviction moratoriums are protecting tenants. The coronavirus stimulus package will provide much provide needed cash to the hardest-hit tenants in the US. This includes a direct payment of $1,200 for each adult. This should help tenants pay rent and also steady the rental market in the United States.
Many fear that the housing market instability will revive a trend that rose in popularity after the 2008 housing crisis: Renters will move in with friends or family to keep a roof over their heads. In turn, this will have a domino effect: Landlords will lose tenants and rental income. However, some experts say it’s unlikely for that to happen. Some also say it’s unlikely that rents will decrease that much as they don’t see landlords all together slashing rents. If you’re a landlord who holds a federally backed mortgage and COVID-19 had affected your real estate business, you can benefit from the Federal Housing Finance Agency’s loan payment deferment program.
Related: COVID-19: Mortgage Relief Programs for Real Estate Investors
Can Unemployment Affect Home Prices?
When thinking about the stock market crash and high unemployment in the US, many start to panic that a housing market crash is near. However, economists were quick to point out that home prices will not plunge by the double digits as they did during and after the Great Recession. This is simply because the causes of the 2008 housing crisis do not exist today. In the last housing market crash, there were many homes for sale due to a surplus of construction and mass foreclosures. There were also easy borrowing requirements which made it possible for unqualified buyers to get a mortgage. This time around, the situation is very different.
Currently, there is a severe shortage of properties for sale. Besides, builders haven’t been putting up enough homes to meet the demand for years. Mortgage requirements are much stricter and borrowers are in better financial shape, so it’s unlikely for a huge wave of foreclosures to happen. Plus, the fed and many state governments, along with some banks, are rolling out forbearance and other relief programs to help Americans who’ve lost their jobs stay in their homes. All of this should help US home prices hold steady and even see an increase in 2020, despite the pandemic.
“Price growth will slow, and it’s possible that prices could decline” in certain markets, says Danielle Hale, Chief Economist at Realtor.com. The hardest-hit housing markets will likely be those with the highest percentage of jobs in tourism, leisure, and hospitality. These are the industries that are most affected by high unemployment due to the novel coronavirus. However, even in these markets, Hale doesn’t expect prices to go down more than 5%. This tells those who need to sell that they may not have to worry in 2020.
Related: US Home Prices to Hold Steady Despite Pandemic
But Americans should expect things to get worse before they get better. Unemployment claims will likely remain high until the coronavirus pandemic subsides—and that timeline is still unclear. To stay updated on real estate news around the US and the impact of COVID-19, keep reading our blogs on Coronavirus real estate trends.