Anyone wanting to buy or sell a home in metro Denver this year needs to buckle up and prepare for a wild ride in the months ahead.

“Our forecast suggests the housing market recovery will look like a “flying W,” with an initial sharp drop this spring, a noticeable rebound in the summer followed by another dip in the fall, and on a final solid road to recovery by spring 2021,” predicts Ralph McLaughlin, chief economist with Haus, a startup that co-invests in homes with individuals.

The housing market in Denver and many metro areas started the year on a strong footing, with a lot of younger households looking to buy and older households looking to upgrade or downsize. Now metro Denver is among several areas in the country looking at sales declines over the next several months.

Home and condo sales dropped 5.12% in March on an annual basis in metro Denver, according to the Denver Metro Association of Realtors. Nationally, they still rose 0.8% year-over-year, but fell 8.5% between February and March.

“Unfortunately, we knew home sales would wane in March due to the coronavirus outbreak,” Lawrence Yun, chief economist at the National Association of Realtors, said in a release. “More temporary interruptions to home sales should be expected in the next couple of months, though home prices will still likely rise.”

The Haus model, which McLaughlin has been working on since December, shows some large declines in homes sales coming Denver’s way. It predicts a 33% year-over-year drop this month, a 43.1% drop in May, and 38.3% drop in June and a 24.1% drop in July.

Declines that large will mean reduced commission income for agents, fewer purchases at home improvement and furniture stores and less work for movers and remodelers.

But declines will ease up into the fall as consumers gain confidence — until that confidence gets shaken yet again.

“We think the economy will open back up in a limited fashion in late spring and early summer. There will be a flood of pent-up demand,” McLaughlin said.

Many forecasts call for a sharp decline, now underway, and either a sharp or more prolonged path back, know as a V-shaped or U-shaped recovery.

“It all depends on the virus,” said Frank Nothaft, chief economist with CoreLogic, during a webinar Tuesday.

If the outbreak recedes and doesn’t return in the fall, then chances improve for a V-shape recovery in both the economy and housing markets bounce back. But given the severity of job losses, he concedes that a U-shape or slower rebound might show up.

Mike DelPrete, a real estate tech strategist based in Boulder, forecasts a checkmark-shaped recovery is in store, a sharp drop followed by a steady but prolonged road to recovery. Some have a different name for it: the Nike Swoosh.

“Rather than a V- or U-shaped recovery, the current evidence supports more of a checkmark-shape. It begins with a severe, immediate drop, lasts three to four weeks, and is followed by a gradual recovery,” he said in a blog post.

McLaughlin’s forecast diverges from the others because he predicts the novel coronavirus makes a comeback in the fall with the return of cold weather, disrupting the economy and derailing the housing market a second time. That’s what makes for a W-shaped recovery.

That view gained more credence after Robert Redfield, director of the Centers for Disease Control and Prevention, told the Washington Post on Tuesday that the return of the COVID-19 outbreak could align with the start of the flu season, straining health care resources.

“There’s a possibility that the assault of the virus on our nation next winter will actually be even more difficult than the one we just went through,” he said.

Prices will be sticky

Despite the sharp drop in sales and a sharp drop in mortgages for home purchases, home prices won’t move much in metro Denver.

McLaughlin argues that’s possible because home prices are sticky on the way down. If they don’t receive the offer they want, many sellers will take their listings off the market. So long as reduced supply can match up with reduced demand, a market can see lower activity without a significant readjustment in prices.

Most homeowners are sitting on record amounts of home equity and if they were paying attention, holding a mortgage rate in the 3% range. That’s a big difference from the last real estate cycle when many homeowners had minimal or even negative equity and were stuck with mortgages with escalating payments.

The Haus model predicts that metro Denver home prices will flatten in June on a year-over-year basis and then turn negative in July. Price declines will stick around until January or February 2021. But the declines won’t come anywhere close to those experienced in the late 2000s. The worst decline in metro Denver will come in October and run just 1.2%.

Boulder’s home price declines won’t show up until late in the year, and they will last two or three months at most. Colorado Springs home prices will go negative in November, and that weakness will last through February. Fort Collins’ price dip will run from December to February.

But what about the 26.5 million workers, including nearly 280,000 in Colorado, who have filed for unemployment assistance since mid-March? Gad Levanon, vice president of labor markets for The Conference Board, estimates that the U.S. unemployment rate could soar above 20% in April and May and will remain in double-digit rates this year.

That will have consequences for the housing market, but more so for multi-family than single-family. Jobs at the lower end of the pay scale are being hardest hit by social distancing requirements, and those who are losing their jobs are more likely to be renters, not owners. Job losses will hurt purchasing demand, but McLaughlin argues that stimulus payments and the sweetened federal unemployment benefits at $600 a week will help many households stay current.

For those who can’t stay current, deferrals and suspensions are being offered on federally-backed mortgages, which are the large majority out there. As of April 23, 3.4 million U.S. homeowners had forbearance plans representing 6.4% of all active mortgages, according to Black Knight, a real estate data firm. McLaughlin estimates forbearance agreements could surpass 10% of all mortgages by this summer.

Forbearance simply pushes back mortgage payments, tacking them onto the end of the loan. It will forestall foreclosure notices and auction sales, which were big contributors to price declines in the housing crash. And those who are able to stay current will have the chance to refinance to shore up their financial positions.

“This will lead to fewer distressed properties than during the Great Recession, and as such very little downward pressure on home prices,” McLaughlin predicts.

Denver not immune

Although metro Denver won’t be as insulated as some areas from the downturn, McLaughlin doesn’t put it in the camp of the most damaged housing markets, which he predicts will be in the Pacific Northwest, Nevada, and large parts of Florida.

“Denver, for the most part, won’t get off scot-free, but it won’t be hit as hard as some of the other markets in the U.S.,” he said.

Nevada and Florida have a much larger concentration of jobs and spending in tourism and hospitality, contributing to metro areas in those states suffering a bigger hit in home prices.

One area where metro Denver will see declines is in new home construction. The Haus model predicts permits to build new homes are likely down by a nearly a third this month, and will be nearly cut in half by June. They will remain negative year-over-year through February. That lack of new supply could prove problematic in the long run, especially if the region remains popular for those relocating, and it will mean fewer construction workers employed in the short-run.

The mortgage markets will remain a mixed bag. Tighter loan underwriting standards, reduced household incomes, and damaged credit scores may knock more potential homebuyers out of the running, reducing purchase mortgages. But with interest rates at historic lows, because of the Federal Reserve intervening in the market, the demand to refinance mortgages will be intense.

The Haus model predicts year-over-year increases in mortgage refinancings of 155% or more from April to July in metro Denver, with a 119% increase in August. That will keep the mortgage industry busy and compensate for the loss of new mortgage originations, which are projected to fall from now until February 2021 in metro Denver. The biggest year-over-year declines will top 46% in May and June.

Nothaft said applications nationally for mortgages to purchase a home are down 28% in early April compared to a year earlier, according to a CoreLogic database. But he notes that those declines are coming mostly among older buyers, who are more fearful about venturing out and catching the virus.

The Conference Board places remodeling a home or moving into a new home into the “somewhat” contagious category. They aren’t as dangerous as going to a concert or jumping on a commercial flight, but both involve an elevated level of risk. Next month, real estate agents in Colorado can again market homes to buyers in person.

Among millennials, some of whom are anxious to transition from renting to owning their first homes, the declines in mortgage originations have been minimal so far. That would indicate in the months ahead that entry-level homes should see more interest than more expensive homes, especially luxury homes, which are vulnerable to gyrations in the stock market.

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