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Originally published on Forbes.com

There is an old saying in the real estate development business: when a novice makes a mistake, it’s because they missed the nuances of the market; when a pro makes a mistake, it’s because they missed the obvious. Some participants in the residential sector have been applauding the resilience of homebuyer demand and rent collections while looking over their shoulder, bracing for a sudden slap in the face when the government “stimulus” winds down.

Is that slap really obvious, and real? And if so, will it be felt by the entire housing market, or only at certain levels of the market? We need to look a little deeper because very little is obvious in this environment.

All agree that steps were taken very quickly to inject money into the economy and to provide relief for people with mortgages. These measures have included:

• Direct payments to the general public and aid to small businesses
• Enhanced unemployment benefits ($600 “FPUC”)
• Mortgage forbearance
• Rent forbearance and eviction moratoria
• Limits on foreclosure actions

Massive transfers from the federal government have kept the economy from sliding into a depression, despite depression-like unemployment rates. Even with states, cities, and suburbs reopening their economies, it will take a while to get back to anything close to full employment. Government transfer payments have kept spending from collapsing completely, for now.

Many in the housing business are saying there has been a “V”-shaped recovery in home sales, as well as amazing resiliency in the apartment market, but what happens after the music stops? Nobody can forecast this with confidence, but it certainly is a good time to start thinking through the possibilities and doing the analysis.

In order to address this question, it helps to divide the residential market into for-sale and for-rent and think about each sector separately.

For-Sale Housing

It looks a lot like a “V” for home sales. Sales by many builders have been increasing week-by-week since the middle of April. Some said that May was their best month yet, and we are hearing the word “amazing” uttered by executives at these companies. Homebuilders and developers are feeling more confident about their outlook for the rest of the year, homebuilder stock values have doubled since March, and a relatively small number of new-home developments have seen significant price reductions. The climb in the numbers of mortgage applications for home purchase has been fast and steady in recent weeks. That is all remarkable in the face of these shocking unemployment rates.

Government measures have certainly been supportive of home prices and home sales during this crisis. If the fiscal stimulus is removed as scheduled at the end of July, aggregate spending will decline, which will result in an economic drag that could indirectly affect home buyers.

When forbearance programs and foreclosure moratoria come to an end, we might see a surge of foreclosure activity. More than 8% of mortgage loans are currently in forbearance, according to the Mortgage Bankers Association, which hints at the extent to which there is economic distress that has not yet been reflected in mortgage delinquencies. That said, a survey by LendingTree revealed that 70% of the people who applied for forbearance actually had the money to pay their mortgage, and didn’t “need” it in the strict sense of the word. Be that as it may, there are certainly some homeowners who are avoiding delinquency by deferring payments to a later date under these forbearance programs.

People who lose their homes to foreclosure often look for a home to rent. Higher foreclosure rates would add to both supply and demand for single-family for-rent, adding more fuel to that already fast-growing segment of real estate.

The good news is that the unemployment rate is dropping, which is reducing the number of homeowners who are without income. The pace of improvement in the labor market is going to be the key to sidestepping a foreclosure problem, so those numbers bear watching.

That said, the for-sale sector might be able to escape a serious impact, but not for a happy reason. The current economic crisis is impacting the lower echelons of society disproportionately wherein the retail and service/hospitality workers have taken the brunt of the losses. The people who buy new-construction homes are typically at an economic level that is less-acutely affected by this problem. They have more secure jobs, much more money in savings, and many have participated in the strong rebound in the stock market.

Add to this the fact that people think about a home as a refuge, even more now than before the health crisis and the stay-at-home orders. And to the extent that new homes start to offer enticing healthy-home features that were not common in pre-Covid homes, that could add to demand for those newly-built homes.

Going into this crisis, there was an undersupply of housing and a low level of new home construction relative to the pace of household formations and replacement demand, and these conditions will continue to support new home sales in the years to come. This is the key distinction between this downturn and the last one, which was driven by an oversupply of housing. 

That is not to say there won’t be some additional incentives on inventory homes. We are already seeing builder concessions appearing in the marketplace. The first-time homebuyer market, which was just starting to build a lot of momentum, will probably be set back to some extent, particularly in regions that have been hit the hardest by layoffs. And at the other end of the price spectrum, buyers seeking “jumbo” loans are finding it difficult due to the disruption in mortgage markets.

Nonetheless, the fundamental drivers of housing demand are still in place. Millennials are continuing to have children, and that will fuel increased demand in the suburbs. This demand will be served by homes built for sale, as well as single-family homes built for rent; either way, this demand will still generate more home construction. Assuming the recent uptrend in hiring in the economy continues, the outlook for new home sales is promising.

Rental Housing

Early in this crisis, when rent forbearance measures started to emerge, it was anticipated that landlords would suffer a large number of renters skipping their rents. April came, and collections held solid. May came, and again rents were collected at close to normal rates. June 1 came, and, so far, rents are being collected at high rates (with some increased incentives being needed for some newly built developments that are still in lease-up). Some apartment operators report that they are getting new leases at a pace not quite at pre-Covid levels, but “getting pretty close.”

That said, renters are not always on as solid a financial footing as the group that buys, so will things go south as soon as the enhanced unemployment benefits drop out? The answer will differ between various types of apartment complexes. The class-A buildings have been holding up the best in terms of collections and rents, with some minor reductions in collections in class-B and more significant reductions in class-C, where the tenants have insufficient savings to tide them over. Class-C apartments are also home to a large number of people who are using some of the supplementary unemployment money to cover their rent.

This crisis is worsening the disparity among economic groups in this country, and as a consequence the class-C apartment market-rate developments are the ones that face the most serious risks in the second half of this year. Many people now on unemployment who experience difficulty getting re-employed as the economy reopens, and who after July will not get the extra $600 payments, will seek forbearance starting in August, which will have an impact on the revenues collected by their landlords.

The high-end apartments, by contrast, often house people who are “renters by choice.” That refers to the group who could afford to buy a home, but prefer the convenience of being a renter. This type of tenant has increased in share in recent years, with some developments renting to people who have incomes of $75,000 to $100,000. The class-A buildings will likely be well supported by demand from this population. There will be some additional downward pressure on rents in the second half of the year, but by next year rent growth in this type of development is expected to start to re-appear, despite a fairly full pipeline of projects heading toward delivery.

Some developers are feeling quite sanguine about the prospects for new luxury rental buildings in prime locations, noting that the crisis has delayed or killed (via financial partners backing out) a number of projects that would ordinarily have been competing for them. They foresee a reduced supply of new rental completions three years from now as a result of this, which makes them feel more optimistic about the future demand for their offering. They also see the opportunity to set themselves apart from the competition by offering healthy-home features that are not available in older luxury buildings, such as improved HVAC systems, antimicrobial surfaces, and some touchless elevator technologies that are currently in use in Europe and Asia.

Flat Prices on Average, But Wide Variations Underneath

When the fiscal and other supports wind down, there likely will be some additional concessions at managed rental developments (read: two to three months worth of free rent), most acutely in the working-class rental buildings. On the for-sale side, there will probably also be an uptick in foreclosures after the moratoria end, and that will likely have a negative effect on housing in the middle price ranges, especially in metro areas whose economies are concentrated in the hardest-hit industries (such as tourism).

Taking all of that into account, the forecast is for flat single-family home prices on average for this year, returning slowly to rising average home prices starting in 2021. Of course, averages can be misleading. The “A” projects in the “A” locations will likely remain strong, offsetting some of the weakness in the moderate price tranches. There will also be differences among metro areas. The economic and housing effects will be quite different in Las Vegas, Detroit, New York, and Miami.

The forecasts of home prices by economists who follow housing markets are all over the map. The Zillow 2Q Home Price Expectations Survey features forecasts from 100 economists (including the author), and those forecasts range from -10% to +5.5% for the calendar year 2020. Such a divergence reinforces the point that in this environment, very little is obvious.