By Hugo Dante
Disruption was the theme of 2020. The universal COVID-19 disruption dramatically affected global and domestic economic growth. The housing market was no exception at the start of the pandemic, with sales activity plunging in the spring. However, a combination of resilient households, robust government support, and constrained supply has led to red-hot sales activity in the housing sector.New single-family home sales were at a seasonally adjusted annual rate of 841,000 in November, up 20.8-percent year-over-year according to the Census Bureau and Department of Housing and Urban Development. Home prices also rallied in the pandemic, with the median sales price of an existing home rising to $310,800 in November, up more than $30,000 since March and 14.6 percent year-over-year. Mortgage delinquencies have held steady due to government support, rising to 2.81 percent in the third quarter of 2020 but remaining far below levels from the Great Recession.
Mortgages are supported by resilient household balance sheets. Households entered the pandemic largely in a strong financial position, with debt as a share of income at its lowest level since the 1980s. The housing market also benefits from self-selection. While a serious problem for the broader economy, the brunt of job losses has been most felt by lower-income individuals who are more likely to rent. Homeowners have higher income than the general population and home buyers earn even more. The median household income of home buyers was $93,200 in 2020 ($25,000 more than the median U.S. household), according to the National Association of Realtors.
CARES Act forbearance also proved critical in supporting the housing market. At its peak, an estimated 4.3 million homeowners entered forbearance, representing 8.55 percent of loans and more than $1 trillion in mortgage debt. If combined the with residential mortgage delinquency rates at the time, this would have represented a comparable level of delinquencies to those reached during the great recession. While the share of mortgage forbearance has remained flat the last two months of 2020 at around 5.5 percent, it has come down considerably from its peak in June.
January data from the Mortgage Bankers Association shows that in approximately two-thirds of forbearance exits, borrowers exited forbearance with all payments current, or with a loan modification or deferral in place. Only 13.2 percent of borrowers exited forbearance without some form of loss mitigation, while another 7.4 percent paid off loans with either a refinance or home sale. A historically strong housing market has supported residential loan collateral values, keeping mortgages afloat and facilitating borrower exits in the case of crisis.
Finally, constrained housing supply is a major driver of the current rally in home price appreciation. Remote work is driving interest for more space, leading to higher demand for homes in suburban and exurban areas. When combined with a hesitance to list homes amid heightened uncertainty, the current housing supply in the U.S. has been driven to record lows, with October marking one of the tightest housing supplies on record.
The housing market has been a relative bright spot in an otherwise highly disrupted economy. While home values have steadily risen and borrower quality remains strong, millions of borrowers remain in forbearance. As the continual risks of increasing coronavirus cases and lockdowns loom over the horizon, it is important to continue to watch the economic recovery as households rely on their historically strong balance sheets to weather a global pandemic.
Hugo Dante is an economic research specialist at ABA. In addition to the ABA Banking Journal, his writing has appeared in The Hill, the National Interest, and Townhall.
