Economics is often talked about in terms of trade-offs — how one choice stacks up against another choice. For now, that’s good news for the U.S. housing market.
The COVID-19 pandemic has limited people’s choices, said Ralph DeFranco, global chief economist of mortgage services for Arch Capital Services Inc. Travel is constrained, outings are reduced and special occasions like weddings are delayed. One thing that people can spend their money on is housing, DeFranco said.
“Housing demand has been very strong ever since the lockdowns loosened,” DeFranco said. “Even now, we’re seeing demand substantially higher than what it was a year before in terms of mortgage applications, in terms of people looking at homes, these sorts of things.”
DeFranco spoke to Scotsman Guide about why he thinks the housing market is going through such good times. He also spoke about job losses, forbearances and what he thinks needs to be done by policymakers in the coming year.
The pandemic has meant that housing is more important than it has ever been.
What’s your outlook on the housing market?
I am bullish. We are experiencing record-low interest rates. The pandemic has meant that housing is more important than it has ever been. People need a home office. They need room for exercise equipment. They need room for their kids to study. They want room in the backyard for entertainment. We’re seeing red-hot demand for housing. And I think it’s going to stay this way.
Interest rates are expected to stay low for an extended period because the Federal Reserve has shifted policy to be a little more tolerant of inflation. Their goal is to wait for the labor market to really heal up and to see some higher inflation before they’ll raise interest rates. [The Fed is] likely to be very supportive of the housing market for several years to come.
There has been a recent spate of job losses with tens of thousands of cuts at airlines, theme parks and movie theaters. Will that have a ripple effect on housing?
It has been a horrible recession for employment and yet the single-family housing market is stronger than anyone predicted six months ago. It’s having a larger impact in the multifamily space. The bigger impact is on renters who are heavily concentrated in the lower-paying service sector. People who have office jobs, most of them are doing well. If anything, they’re saving more money and that gives them a cushion in their ability to buy a home.
How concerned are you about the millions of borrowers whose mortgages remain in forbearance?
I’m not overly concerned. There’s definitely some risk for some of those people. Others are going to be able to recover because the terms of the forbearance programs have been quite generous. As long as they can go back to making regular payments, then they should be OK.
Talk about how the housing sector is different under COVID-19 than during the Great Recession.
The Great Recession is completely different than this [downturn]. It was really a housing- and financial markets-focused crisis. Last time, we were overbuilt. There was a building boom going on in the early 2000s. This decade, we’ve been underbuilding, so we’re going into this crisis with an absolute shortage of housing. That’s part of the reason that the housing market is hot.
Last time, lending guidelines had weakened and it brought in a lot of marginal buyers, which pushed up home prices. Normally, credit standards tighten in a crisis and then loosen when times are good. That didn’t actually happen very much (after the Great Recession).
Home values got very carried away (during the housing crisis) in certain areas, particularly the Sand States — Florida, Arizona, California, Nevada. That hasn’t happened this cycle either. When we look at home prices, they’re roughly in line with what we think they should be. ●