Pre-COVID19 Home Sales Surge

Sales of new homes in February, as a seasonally adjusted annual rate, came in at 765,000, a 14.3% jump from February a year ago. January figures were revised up to 800,000, the highest rate since May 2007. Existing home sales, the largest portion of the housing market, hit a seasonally-adjusted annual rate of 5.77 million in February, the highest in 13 years. We were finally getting back to pre-Great Recession levels in the months and weeks leading up to the COVID-19 crisis.

The supply of new homes for sale on the market fell to 5 months. The supply of existing homes was at 3.1 months; a 6 months supply is considered normal for the market to clear. Prices of both new and existing homes continued to climb; entry-level prices accelerated the fastest. The housing market entered 2020 with a running start, before interruptions and mandatory shutdowns from COVID-19 tripped it.

The U.S. mortgage regulators and housing authorities announced a program for mortgage holders to delay payments without penalty. Mortgage servicers are asking now for government relief, warning that they are still required to pay investors who own the debt. A wave of missed mortgage payments could bankrupt mortgage servicers; such losses would be quick and sharp, unlike during the housing bust, when delinquencies and bankruptcies occurred slowly but compounded over time.

Real estate investment trusts, known as REITs, have collapsed recently, reaching levels last seen in 2008-09. These companies rely on revenue from real estate holdings, including rental incomes. With everything at a standstill and many state governments issuing delays on rent payment collections, the sources of funding for these trusts are drying up. The fire sales we are seeing could push down home prices, which would further exacerbate the downturn in the housing market. Home buyers don’t like to buy a depreciating asset.

Bottom Line
The housing market was on a tear prior to the crisis and needs to be supported to be the driver out of the virus-induced recession. The Federal Reserve moved to prop up mortgage-backed securities (both commercial and residential), which will help to put off fire sales, but Congress needs to step in as well.

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