February 2020 seems like an eternity ago. But it was just a matter of weeks ago that the economy was booming, real-estate prices were soaring, and everyone was happy and healthy. Then in a matter of days, it all came crashing down.

Most Americans have come to terms with where we are at the moment. Nobody wants to be in this situation, but we’re all working hard to fight through so that we can come out stronger on the other side.

But the big questions deal with the long-term ramifications. In particular, how will this crisis impact the housing market?

Two Schools of Thought

When it comes to the immediate future of the housing market, there are a couple of different schools of thought.

The first school of thought subscribes to the notion that this economic collapse has been unlike any before it. Prior to the coronavirus reaching American shores, the country was in a very healthy financial place -- in fact, the healthiest it’s been for many years. Unemployment was at record lows, the stock market was soaring to new highs, interest rates were low for borrowers, and the housing market reflected all of this -- inching up and up, month after month.

Then it all toppled.

Many believe the fact that it toppled so quickly -- and for reasons unrelated to economics -- is actually good news. There wasn’t some major flaw in the economy -- like there was with the subprime mortgage crisis in 2008 -- that sent everything plummeting to the ground. The markets crashed because of a virus (and the response required to contain it).

So the logic for people who subscribe to this first school of thought is that the economy will pick back up right where it left off. Yes, it’s unfortunate that millions of people have temporarily lost their jobs, but there’s no reason to believe they won’t soon find jobs and get back to work. (That’s the thinking, at least.)

But the longer this shutdown/quarantine lasts, the harder it gets to believe this theory. Because at some point, it doesn’t matter how healthy the economy was prior to the collapse. If the economic engine to this country stays inoperable for too long, it’ll inevitably require more time and effort to start back up. 

And this is where the second school of thought comes into play. It says that this is more than just a blip on the radar and that there will be both short-term and long-term consequences -- especially in the housing market.

What’s in Store for the Real Estate Market?

The housing market tends to lag behind the rest of the economy. It can take weeks – even months -- for positive or negative factors in other areas of the marketplace to impact housing prices and transactional activity.

Remember, a housing crash occurs when supply far outweighs demand. In these cases, sellers have to lower their prices to the point where buyers are willing to pay. Currently, demand still exists. But as unemployment lasts longer and more would-be borrowers get turned down by lenders, real estate will sit on the market longer and this will ultimately drag prices down.

With that being said, here are some of the trends that we need to be aware of moving forward:

1. Record-Low Mortgage Rates

Interest rates are incredibly low throughout nearly every nation and economy. (They’ve basically bottomed out. If they went any lower, lenders would have no motivation to give borrowers money.) Just look at this home loan calculator and notice how inexpensive it is to buy a house right now!

On the one hand, this is good news for the real estate market. Lower rates mean more opportunity for buyers. But we’re living in strange times and normal rules don’t apply. Interest rates have been slashed on purpose and it’s unclear whether it’s working.

Low mortgage rates are great, but what happens if a borrower’s income has suddenly disappeared? Lenders don’t care what a borrower was earning three months ago -- they care about if there’s a steady paycheck coming in today, tomorrow, etc.

Low mortgage rates are excellent news for those who are still employed. For those who are out of work, it’s kind of a moot point. (But, for the record, expect interest rates to stay this low for at least the remainder of the year.)

2. Skipping Mortgage Payments

An increasingly large number of U.S. homeowners aren’t paying their mortgages. As of mid-April, nearly 3 million home loans were in forbearance plans that permitted them to delay payments without penalty. That number represents 5.5 percent of borrowers with a collective $651 billion in unpaid principal.

For mortgage servicers, this is creating a potential problem with liquidity. At this point, they’ll need to advance $2.3 billion a month just to make good on the payments that are due to other investors and government-guaranteed mortgage-backed securities.

If you feel like this is starting to look like a house of cards, you aren’t alone. In an economy this big, nothing is independent. It all works together. And when you pull the rug out in one area, the reverberations are felt everywhere.

3. Decline in Home Sales

At the end of 2019, economists were bullish on the real estate market for 2020. They felt like all of the necessary pieces were in place for another strong year of growth and appreciation. But they never foresaw a world where a deadly pandemic would lead to massive shutdowns and layoffs.

According to a new report from Fannie Mae, home sales will fall by as much as 15 percent in 2020. This decline will be driven by a significant downturn in the sale of existing homes. (They predict a drop from 5.34 million units in 2019 to 4.54 million units in 2020.)

The problem is multifaceted. On the demand side of things, the steep rise in unemployment coupled with stay-at-home orders will prevent millions of Americans from being able to afford the purchase of a home. And even if they can afford to buy a house, their inability to get out and see properties in person is a significant source of friction.

“On the supply side, the number of listings is falling, as those with homes to offer may either be hesitant to allow strangers to tour their home or worry that the lack of demand is placing downward pressure on the sales price they might otherwise receive,” Fannie Mae chief economist Doug Duncan mentioned in the report.

All of this leads to the question that everyone -- buyers and sellers included -- are quietly asking: What will happen to house prices?

The good news for current homeowners is that home prices aren’t necessarily going to plummet. In fact, Fannie Mae still projects a modest rise in the median price for both new and existing homes. The bigger issue is that homes will likely stay on the market longer before selling.

If you’re planning to sell your house this year, patience will be key. For everyone else, there’s no need to worry quite yet. Fannie Mae expects the U.S. economy and real estate market to rebound in a big way in 2021. However, this all depends on the virus and the nation’s continued response.

“The historically rapid decline in economic activity, the accompanying employment loss, and our limited, though improving, understanding of COVID-19 make this a particularly challenging forecast environment,” Duncan said. “The variability around this forecast is wide, and is dependent on the incidence, severity, and duration of the virus, as well as the response of the public and policy makers to new information.”

Looking to the Future

Nobody has a crystal ball that can tell us where we’ll be in six weeks, six months, or a year. However, as history has shown, tough times bring out the best in Americans. It’ll be a little bumpy over the next few months, but we’ll eventually come out on the other side of things better, stronger, and healthier.