The pandemic has rocked the housing market, putting an end to the long, steady post-2008 climb. As the U.S. cautiously reopens, how bad, exactly, is the damage?
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The news isn’t all negative. Sales volume continues to rebound, and some markets are seeing all-time highs in home prices. But there are worrying trends. Many potential sellers are staying away from the market; according to Realtor.com, there are almost 32% fewer new weekly listings compared to last year, and 43% fewer price reductions.
While buyer demand seems to be holding steady, access to credit has gotten tighter, as lenders adjust their standards in anticipation of pandemic-related financial difficulties. That means a lot of potential buyers might decide— or be forced to— continue renting instead of buying their first home.
But one of the most worrisome – and potentially damaging – consequences of the pandemic is the blow to consumer confidence. A new study from Clever Real Estate surveyed 1,000 homeowners, and found that many of them are experiencing record levels of anxiety, buyer’s remorse, and financial stress. Let’s break down some of the study’s findings, and discuss what they could mean, especially if these sentiments take hold, and spread to the rest of the market.
Home Buyers Aren’t Feeling Great – and with Good Reason
While homeowners, as a group, are more financially secure than renters, that doesn’t mean they’ve been insulated from recent financial shocks. Over half the homeowners surveyed said at least one person who typically contributes to housing costs had lost their job since purchasing their home. That’s a real threat to their ability to stay current on their mortgage.
Of 2020 homeowners surveyed, buyers who purchased before the start of the pandemic – i.e. in January or February 2020 – were slightly more likely to be affected by pandemic-related job loss than homeowners who bought after the start of the pandemic. This makes sense, as many potential buyers were likely forced to abandon their home search by pandemic-related financial pain. Still, 60% of pre-pandemic buyers have experienced income loss, to go with 50% of post-pandemic buyers who’ve seen income decrease. Disparity aside, a significant percentage of all recent buyers are dealing with financial shocks.
These shocks took a while to work their way through the system. In an April survey, 84% of homeowners were paying their mortgage in full, but in the latest survey, only 55% of recent home buyers were paying their mortgage in full. That number sunk to 45% if a household financial contributor had lost their job.
Recent Homeowners Are Falling Behind on Their Mortgages
Even more troubling is that nearly 19% of recent home buyers are not only not paying their mortgage – they haven’t even made arrangements with their lender for forbearance. Recent buyers were also more likely to be making reduced payments, when compared to all buyers.
Overall, recent buyers are 1.7x more likely than average home buyers to be late on their mortgage without making arrangements, suggesting that 2020 buyers were both poorly prepared for a home purchase, and have been hit harder.
The delayed increase in forbearance may hint at more financial pain ahead. Depending on how the economy recovers, we could see a continued increase in mortgage forbearance, or even a spike in delinquencies; a worrying 80% of recent home buyers are either somewhat or very concerned about their ability to make mortgage payments in the coming months. This isn’t surprising when you look at their levels of debt and savings.
The average recent buyer has taken on significant household debt in recent months; 37% of recent buyers have taken on more than $2,000 in non-mortgage debt since the pandemic began. That’s in addition to mortgage and household debt they already held. Many of them had little choice; according to the survey, nearly a quarter of recent home buyers have less than $1,000 in emergency savings. Why? Over half of them used savings for their down payment, meaning they exhausted their savings shortly before or shortly after the beginning of the pandemic.
The American Dream – or Nightmare?
Clever surveyed homeowners last year about their feelings towards their purchases, and their responses were overwhelmingly positive. Just a year later, those trends have been turned upside down.
Today, homeowners are feeling anxiety and intense buyer’s remorse. Compared to buyers from 2015 to 2019, buyers who purchased in 2020 are more than twice as likely to feel anxious about their home, 1.6x more likely to feel stress, and only half as likely to report feelings of comfort and security. They’re also 28% more likely to report feeling buyer’s remorse.
Interestingly, buyers who bought in 2020, but before the pandemic, are most likely to feel buyer’s remorse. That suggests that buyers who bought during the pandemic are more likely to feel like they got a great deal— or at least that their home value isn’t likely to decline too much.
These homeowners aren’t worried about small issues like real estate commission or changing light bulbs. A potential drop in home values is, by far, the biggest fear of 2020 home buyers, with over 36% citing this as their main concern. Just under 23% worried that they didn’t get the best deal possible, and just under 23% said their mortgage was too expensive, to round out the top three.
The fear of a decline in home values is also reflected in the number of homeowners who are worried about going upside down on their mortgage; almost 64% of pre-pandemic 2020 buyers are worried about going underwater, while 53% of 2020 pandemic buyers are. Again, the results suggest that buyers who purchased just before the pandemic are the worst off— or at least feel as if they are.
What’s interesting about these findings is that, so far at least, they seem to be based more in emotions than in facts. Home prices haven’t dipped below last year’s prices, and some markets have hit record high prices already this year. Most of the data suggests we’re headed towards a checkmark-shaped recovery, in which the market recovers quickly as the lockdown eases.
Redfin reported that housing demand was up 17% in May compared to pre-pandemic rates, and the Mortgage Bankers Association reported week-over-week sales increases through May and into the first week of June.
Today’s housing market finds itself in a nearly unprecedented situation, as consumers and the market itself pull in opposite directions. Will the fundamentally sound market be dragged down by flagging consumer confidence, or will depressed consumers become more optimistic as the market demonstrates its strength? The outcome will have serious ramifications for the housing market, not to mention the larger economy.