Update: Housing and Mortgage Markets Amidst the Pandemic

In March, when the COVID-19 pandemic began to accelerate, the economy began to shut down and so did the market for buying homes.  Within weeks, the MBA Purchase Application Index had dropped 35%, right at the start of the spring buying season.  Our initial assessment of the impact of the pandemic on home purchases was very pessimistic.  But then, a remarkable thing began to happen.  The housing market began to recover.

In the latest reporting from the MBA, purchase applications are now 33% higher than they were this time last year.  It has been the very picture of a V-shaped recovery – and then some!

What has happened to the home purchase market?  How does this change our assessment of the pandemic’s impact on this year’s purchase volume?

In a previous blog, we broke down the impact into two segments.  We estimated how the number of households “able” to buy a home would decline.  And then we estimated how the percentage of households ”ready and willing” to make a home purchase would change.

The main driver of the change to the “able” segment was unemployment.  The number of people thrust into unemployment by the pandemic will affect the number of households able to make a home purchase this year.  We made assumptions about which households would be most affected by the sudden, unexpected unemployment.  As it turned out, far more people in the lower income levels were affected by layoffs and furloughs.  These people were less likely to be in the pool of possible homebuyers in the first place. 

We had estimated that the homebuyer pool would decline by 26% due to unemployment impacts.  After further analysis, we now believe the decline in the “able” homebuyer pool to be more on the order of 12.5%.

Next, we turn to the percentage of households “ready and willing” to buy a house.  In our previous blog, we thought this component would decline by about 15%.  However, with the strength of applications, we are adjusting this up to decline by only 9%.  Even though purchase applications are higher than expected, we believe that more of these purchase applications will fall out as tighter loan conditions (for example, higher required down payments), dissuade some potential home buyers from proceeding with their purchases.  Indeed, Ellie Mae reported closing rates for loan purchase applications has begun to dip since the pandemic took hold, even though refi closing rates haven’t changed.

The net result of these factors, we believe, is a purchase loan volume that declines by only 20% in 2020 – 12.5% due in our ”able” component and 9% due to our “ready and willing” component.  This puts our 2020 purchase estimate at about $953 billion.  However, our confidence interval around this updated estimate is still very wide.  There continues to be much uncertainty about how quickly the economy can recover, what trends evolve in case numbers and treatment success for the disease, and how both of these factors affect the housing market and mortgage financing.