Why the pandemic isn’t scaring away first-time homebuyers

The coronavirus pandemic has ravaged many industries yet the housing market — for the moment at least — strangely appears to be in as good or better shape than before the crisis.

This seems counterintuitive. After all, Pennsylvania’s shutdown orders declared real estate nonessential, stifling the industry locally.

In other states also severely affected by the virus such as Michigan, New York and Massachusetts, lockdowns and social distancing guidelines led to precipitous declines of mortgage rate-lock activity of 25% or more. Lenders also undertook targeted steps to tighten credit standards.

However, in the months after the coronavirus first hit the U.S., new data indicates a remarkable turnaround for the housing market.

Albeit, the Northeast still lags behind in rate locks, but many Southern and Southwestern states are powering ahead. Meaning, overall, rumors of the housing market’s demise are greatly exaggerated.

In a new housing report based on analysis from the American Enterprise Institute’s Housing Center using Optimal Blue mortgage rate-lock data, purchase volumes jumped 19% for for the week of May 25 (week 22) compared with a year earlier. In the past four weeks, the market not only returned to normal but rose significantly from weeks 14 to18, when the average weekly year-over-year decline was 15%.

Other recent datasets had similar upticks, like the Mortgage Bankers Association’s weekly survey, which showed purchase applications rose 5% the last week in May, also an 18% jump from a year earlier.

Interestingly, after an initial deceleration, home price appreciation, according to the rate-lock data, also appears to be back in the 5% range before the shutdown orders took full effect.

This might reflect a temporary pullback in supply as potential sellers took houses off the market or stopped listing them altogether. Meanwhile, demand has remained strong, especially at lower price points and in less expensive markets, many areas of which were less affected by the pandemic.

This remarkable turnaround seems mostly driven by first-time homebuyers jumping into the market. These borrowers are younger, more technologically savvy and open to virtual tours.

However, in recent weeks there are also signs of a strengthening repeat homebuyer in the market. While some of this may reflect pent-up demand, mortgage rates of around 3.25% for a 30-year, fixed-rate loan could help sustain this recovery for a little longer.

While credit has tightened, such changes were narrowly targeted and mostly occurred in March. It was meant to to protect both applicants and lenders from undue risk at the time.

The Federal Housing Administration, which typically originates the riskiest loans, has fallen as a share of lending to 21% of purchase rate locks, down from 23% before the onset of the pandemic.

Virtually all of this decline was attributable to the FHA’s riskiest credit band of borrowers with credit scores below 640.

Many reports have portrayed this credit tightening as a bad outcome, but it’s actually welcome news. With today’s economic uncertainty, it seems dubious (at best) to recommend a borrower who has struggled in the past with payments to risk their life savings by taking on more debt and jumping into the housing market to build some equity.

Given the spiraling unemployment and how unaffordable housing has become after nearly a decade of price growth, better advice to certain borrowers may be for them to remain on the sidelines until the economic picture has cleared up.

For the moment, it appears that the housing market has reduced the highest-risk lending with rather surgical precision, but it’s not out of the woods yet. More than 4 million borrowers filed for forbearance by mid-May, allowing them to forgo mortgage payments for a couple of months.

Once payments are due again, and if unemployment levels remain high, delinquencies and foreclosures will pick up. This will likely have a negative impact on home prices, especially in entry-level markets where prices were unsustainably pumped up by risky FHA lending the past nine years.

After connecting the dots on the data, it appears that on a national basis, the housing market has at least temporarily recovered, and that credit tightening has been targeted and prudent. Time will tell whether this recovery is only pent-up demand or actually has staying power.