(Bloomberg) -- The U.S. housing market, which was headed for a hot spring-selling season, may not be so healthy after all.
As the expanding coronavirus outbreak slows economic activity, roiling markets around the world, there’s a 60% chance of the U.S. economy going into a recession this year, said Mark Zandi, chief economist at Moody’s Analytics Inc. That economic disruption would batter the housing market, despite record-low mortgage rates.
“Housing is being buffeted by two gale forces moving in opposite directions,” Zandi said, referring to low rates and virus-fueled economic turmoil. “The question is, what’s the end result of all that? In all likelihood, the recession will trump the lower rates.”
The virus arrived just in time for the housing market’s key season, which was shaping up to be one of the strongest in years. An unusually warm winter brought buyers out early to take advantage of the low rates and they’ve had to battle for listings that are more scarce than ever.
Though stocks recovered somewhat on Tuesday, markets have plunged in recent days, with down payments for some buyers evaporating. The rapid decline in oil prices this week will likely harm Texas and other states that depend on the energy sector. And as Americans hunker down at home, forgoing vacations and movie dates, service and retail workers may lose their jobs.
The economic distress will slow home sales, and prices nationally will likely flatten, or fall slightly, after years of gains, according to housing experts. Concerns about the coronavirus, and the overall economy, are already weighing on the market –- delaying some listings and keeping potential buyers on the sidelines, said Lawrence Yun, chief economist of the National Association of Realtors.
Yun sees the odds of the recession at about 40%, up from just 5% about a month ago. While the dramatic fall in interest rates may push some potential buyers into the market, the economic hit from the coronavirus could drive home sales down 10% in the short term.
“The stock market crash is no doubt raising economic anxieties, while the coronavirus brings fear of contact with strangers,” Yun said.
The potential economic fallout still hadn’t completely registered this past weekend for homebuyers in Seattle, an epicenter of the U.S. outbreak. On Saturday, around four dozen groups filed through a four-bedroom Tudor in the Whittier neighborhood listed for just over $1 million. Many said they had hoped the virus would keep other would-be buyers away in a market where there’s little inventory and bidding wars are frequent.
At another open house nearby, handshakes were out, but plenty of home shoppers came for a look. Craig Rothlin, 34, and Kanako Nakarai, 31, were among them. Both work for tech companies, and have been hurt by the recent stock market rout.
“A good chunk of our down payment is caught up in that,” Rothlin said.
The couple had been waiting to see prices come down. But, so far, that hasn’t happened. The last home they bid on got multiple offers and sold for $180,000 over the asking price.
Home prices have surged in markets like Seattle and San Francisco in recent years, pushed up partly by the expansion of the tech industry and its high-paying jobs. But as the economy wobbles, those areas are likely to see the sharpest declines.
“The housing markets out West are really juiced,” he said. “If things don’t stick to script, those overvalued markets are much more vulnerable to price declines.”
Nationally, the biggest drag on the housing market has been a lack of inventory, especially at prices that first-time buyers can afford. Home shoppers at the bottom-end of the market have been stretching to make purchases, with entry-level values surging 60% since 2015, according to data from Redfin. Available listings for the bottom third of the market shrunk by 71% during the same period.
Some owners will choose not to list their properties until the crisis is over, fearful they won’t get a good price. But in a recession, others could be forced to sell, according to George Ratiu, senior economist at Realtor.com.
“If there is a marked economic slowdown accompanied by job losses, that would put a lot of pressure on homeowners,” he said. “We would see a change in the inventory situation. Instead of a severe shortage, you would start to see inventory ramp up as people get interested in offloading.”
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