Home prices are ‘downward sticky’ — and that could bode well for a bounce-back

First American Financial Corp. chief economist Mark Fleming is confident that, despite the coronavirus outbreak’s large-scale effects on the economy thus far, we shouldn’t quite count on home prices plummeting just yet.

Why? It’s a concept Fleming explained as “downside stickiness” in First American’s latest House Price Index report.

“While every recession is different, we examined how the three most recent recessions impacted house prices for insight into how house prices may fare in the current environment,” said Fleming. “With the exception of the 2008-2009 recession, house prices have demonstrated their ‘downside stickiness’ — zero or slow growth, but not much decline.”

Downside stickiness is fairly unique to houses, Fleming said, because while aggregate demand shocks place heavy downward pressure on the prices on goods and services during a recession, it doesn’t work that way with houses. Often, sellers just pull their homes off the market rather than sell them at lower prices. And in this instance, sellers have even more incentive to remove listings for caution of stemming the spread of COVID-19.

This dynamic played out in March, as the supply of homes for sale declined by 10.2 percent compared with one year ago,” said Fleming. So, even though existing-home sales decreased 8.5% between February and March, homes are likely to remain downside sticky and generally retain value.

Fleming acknowledged that home prices fell dramatically during the Great Recession, but that was a matter of differing market forces at play.

“House prices declined in the 2008-2009 recession because homes were overvalued, mortgages were riskier and many homeowners had little equity, which resulted in a dramatic increase of foreclosures and distressed selling,” he said. “Today’s housing market is fundamentally different.

“Heading into 2020, record low inventory, combined with income and employment growth, tighter mortgage underwriting, and strong economic fundamentals, fueled price appreciation that was very different from the housing boom that peaked in 2006,” continued Fleming. “House prices were rising before the pandemic because of a lack of supply of homes for sale, strong demand fueled by near record low mortgage rates and the robust underlying economic fundamentals of what was the longest expansion in U.S. history until March 2020.”

So what does that mean for the spring buying season and beyond? Fleming projected optimism, citing the obvious challenges but seeing good conditions for the market to stay afloat, as well as to rebound after the outbreak is resolved.

“As buyers and sellers pull back from the market and some sellers adjust their price expectations, it’s reasonable to expect a reduction in home sales and a moderation in house price appreciation in this year’s spring home-buying season,” said Fleming. “Yet, transactions will continue to occur. The housing market may be down, but it may be better positioned than many believe.”


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