The Housing Bust Will Take Longer This Time

Let’s start by sketching out a rough spectrum of the pandemic’s impact on major industries. At the hellish end of this spectrum is hospitality, where cruise ships, vacation resorts, and other crowd magnets have been rendered toxic and therefore useless overnight. Most of these companies will fail and their flagship assets will be repurposed or trashed.

At the other, much happier end of the spectrum are “stay at home” businesses like Amazon, Netflix, and food delivery service Instantcart, which can’t publically admit to loving the pandemic but would probably not mind if it became the new normal.

In the middle of the spectrum – and therefore tougher to predict – is housing. Specifically, are prices going to plunge or soar in this new world, and how should buyers and sellers behave going forward?

In the last recession, the answer was clear-cut: Houses were the epicenter – in fact, the cause – of the crisis, and were going to behave the way bubble assets always do.

Home prices ended up falling by 40% in many formerly hot markets, foreclosures soared and banks ended up with mountains of unwanted property that they were legally obligated to unload at fire-sale prices. With hindsight, the obvious strategy was to sell at the bubble peak in 2007 and buy back in at a deep discount a few years later.

This time around housing is collateral damage. It’s expensive in a lot of places – frequently higher than at the previous cycle’s peak. But supply hasn’t run out of control, and pre-pandemic there were widespread house shortages. So a repeat of the previous bloodbath would only make sense in the context of a 1930s-style deflationary Depression – certainly possible but unlikely in a world of negative interest rates and central banks with fiat currency printing presses.

All that being said, it’s still going to be ugly in a lot of housing markets. A global pandemic is not conducive to shaking hands with realtors and touching other people’s doorknobs. An equities bear market, meanwhile, generates the kind of negative wealth effect that makes writing a check for a 20% down payment on a half-million-dollar house even more painful than usual.

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Moon Kil Woong 1 month ago Contributor's comment

Housing will face other issues going forward as the baby boomers end up leaving the market and demand for property by foreign investors drops dead after Corona. Sadly there are a lot of houses sitting vacant as investments which is just tragic.