The United States housing market faces its biggest threat in more than a decade, and whether home prices can withstand the new coronavirus pandemic largely depends on an effective stimulus package, according to Ken H. Johnson, Ph.D., a real estate economist in Florida Atlantic University’s College of Business.

President Trump recently signed a historic $2 trillion stimulus to boost a battered U.S. economy, and getting the aid exactly right is the key to avoiding the first sustained setback to home prices since the end of the housing boom in 2006, according to Johnson.

“If the stimulus package ends up being more than we need, this will almost certainly trigger a non-trivial amount of inflation in the economy, which will increase mortgage rates, which, in turn, will place downward pressure on housing prices,” Johnson said. “If the stimulus is not sufficient enough to hold down effective unemployment and it increases the likelihood of mortgage default, mortgage rates will rise and put downward pressure on housing prices. Only if the stimulus is just right will increasing inflation and higher unemployment be held in check.”

Fixed rates for 30-year mortgages rose from 3.29 percent on March 5 to 3.65 percent on March 19 before moving down to 3.5 percent last week as the stimulus gained momentum. The higher rates are an indication that investors are factoring in inflation and the higher likelihood of default, though the recent downward trend suggests that it was the threat of rising default probabilities that was having the bigger impact on mortgage rates, according to Johnson. 

Since bottoming in March 2012, U.S. home prices rose 61 percent over the next seven and a half years, according to the S&P/Case-Shiller 20-City Composite Home Price Index. The nation’s housing market rebounded from a devastating downturn when investors started renovating and reselling properties after buying them at deep discounts.  

The market has been robust ever since, but Zillow Group recently suspended its homebuying program as a result of the pandemic and how it may affect the housing market. The move means Zillow is worried that housing prices are at risk, according to Johnson.

If mortgage rates were to climb from 3.5 percent to 5 percent, it would result in a 43 percent increase in the interest portion of a housing payment, dramatically reducing the purchasing power for consumers.

“Only time will tell here,” Johnson said. “We are in uncharted waters, making it difficult to tell when and if we got the stimulus package right.”