US House Price Projections from the Economic Impact of the Coronavirus

Abstract

Could the coronavirus-induced economic shocks hurt US house prices as much as the global financial crisis (GFC) did? This article identifies four drivers that could produce much milder house price depreciation (HPD) this time: early and broad mortgage- and housing-relief policy responses, the apparent lack of a preceding house price bubble, historically moderate mortgage- and consumer-debt levels, and lower mortgage rates. The authors apply a previously published time series–based house price model, combined with these exogenous drivers. Fitted to historical data between 1987 and 2020, the model estimates a 1.66 transmission rate from GDP underperformance to HPA underperformance, a ratio of 0.3 between HPA and a mortgage rate relative percentage rally. If mortgage rates rally from 3.7% in 2019 to 2.7% and the GDP takes a hit of 11% below-trend growth, then the model estimates roughly 10% below-trend growth for national HPA, which is much milder than the experience during the GFC.

TOPICS: Financial crises and financial market history, MBS and residential mortgage loans

Key Findings

• • National house price depreciation due to the coronavirus may be much milder than the previous crisis, due to effective mortgage and housing relief policy, lack of a preceding house price bubble and mortgage debt bubble, and lower mortgage rates.

• • Our house price model combines a time-series property with these exogenous drivers and estimates the sensitivity to each driver.

• • Our model projects 10% below-trend growth for national house price appreciation (HPA) if the US GDP takes a hit of 11% below-trend growth, supported with a 1% mortgage rate rally.