Real estate investors around the country have expressed their concern for the housing market in light of the COVID-19 outbreak, and with good reason; a complete lockdown will have far-reaching consequences not only for their investments but for the entire sector. Thus far, in the context of a state of national emergency, it is fair to say that there will be weakening in the market but experts now predict that the impact will be more negative than originally expected.
Prior to the outbreak, the property market was starting to develop momentum resulting from more relaxed approaches to credit and growing buyer power. This has changed in recent months as uncertainty surrounding the spread of the coronavirus has affected buyer confidence and markets overall. It’s still too early to tell what the fallout in the real estate market will be over the long-term, but it is safe to say that the drop in the economy right now will have a negative effect on real estate as a whole. There is no doubt that this has affected investor confidence.
That is why we’re asking: how will coronavirus affect home prices in America? And what can real estate investors expect from the market in weeks to come?
The Impact of COVID-19 on the Economy
The virus COVID-19, also known as the novel coronavirus, was declared a global pandemic by the World Health Organization (WHO) on March 12th 2020 after numerous cases of transmissions were reported around the world. The virus has caused the country to go into lockdown to help contain the spread and flatten the curve as a result, following models set by other countries already dealing with COVID-19. The rules of this type of lockdown are serious – businesses have been forced to close down or work under limited hours and individuals are discouraged from leaving their homes for anything other than essentials. Consequently, many have found themselves retrenched as businesses struggle to stay open with no income. These characteristics do not make for a successful property investing environment.
The effect of this lockdown has already been felt harshly as shown by the recent dip in the economy. Over 6 million Americans have filed for unemployment since the outbreak began and this number will likely increase in weeks to come. This type of increase in unemployment will have a significant impact on the housing market, prices, and the number of buyers that are actively looking to purchase property in 2020.
Some have speculated that COVID-19 may cause a financial crisis of its own if the situation doesn’t improve, a disaster similar in nature to the 2008 housing bubble. The truth is that this is unlikely. Over a decade has come and gone since the housing crash, which has led to many changes being made in the real estate market. Many of the pre-crash loan products have been discontinued and buyers need higher credit scores to qualify for financing to name a few of the biggest differences in today’s housing market. As the most recent comparison, in the original crash housing prices fell by 33%, but by 2016 prices had increased back up to over 50%. The measures put into place after 2008 should protect investors in the property market from such drastic declines.
The Impact of COVID-19 on the Housing Market
Real estate giant Zillow has recently conducted research that found that during similar emergency situations in the past, home sales would drop drastically over the short-term but home prices would likely stay the same or decrease only slightly. This is because house prices are less likely to change when the total number of transactions is down across the board. Instead, this type of crisis situation puts a pause on the market while investors and buyers wait for more certainty. Sellers are more likely to put their property sale off than to drop their asking price, especially in a time when they will need to ensure good profits.
The government has also put stringent measures in place to offer debt relief and put a hold on other aspects of real estate transactions while they gain control of the situation and prevent the economy from reaching collapse. These measures are ultimately targeted at keeping the housing market and other industries together and to prevent a nationwide mass of foreclosures as was experienced in 2008.
The question then still remains for investors, how much will the market really slow down and what numbers can we expect during this crisis? According to research by the National Association of Realtors, the current estimate is that we will see a 10% reduction in home sales compared to this time last year. Interestingly, at the time of writing, average home prices for March were up by 0.6% despite the recent news and lockdown. Some of the bigger metros like San Antonio and Providence have even continued to perform well and show forecasted growth for up to 2% for the rest of 2020 depending on the desirability of the location.
The State of the Real Estate Market
The real estate market right now is characterized by a low supply of homes but contrasted with high demand, generally known to be a successful recipe for property investing. Until the outbreak, this has kept housing prices high as multiple buyers would have to compete on a limited number of properties for sale, particularly in urban areas where the markets are highly competitive.
In a healthy market, the signals of higher demand for homes will typically include growth in average wages paired with low unemployment rates, which we are seeing the opposite of right now by the recent spike in unemployment- it’s no wonder that experts predict the market’s performance will be less than ideal under these circumstances in coming months.
Due to the coronavirus pandemic, many companies have had no choice but to make pay cuts, retrench workers and put their businesses on hold, which has the unfortunate result of crippling both buyer power and motivation. People are more worried about how they will afford to live than they are about closing on a home. Make no mistake; this is a necessary evil to protect the health and well-being of all but investors will ultimately feel the pinch.
There are other steps taken by the Department of Housing and Urban Development that will provide further risk management to the real estate market and offer some support. This includes putting a further, temporary moratorium on all foreclosures and evictions for single-family homes that fall under the FHA for the next two months. As the government makes new decisions public, we will surely see further steps taken as the number of COVID-19 cases continues to increase.
Impact on Materials
There are other ways the real estate market has been affected, beyond pricing and the number of sales. The global lockdown has also had a significant effect on the import of home building materials, many of which are sourced from places like China or Europe. In short, the supply lines for many of these materials have been interrupted or slowed down by additional screening measures taken at ports of entry and will leave investors planning on rehabbing waiting in the dust.
This means that even if the overall COVID-19 situation was to improve and the housing market to warm up, construction could still be delayed until imports pick up again, causing another type of slowdown for real estate. These are the current predictions, but new details and changes come about regularly which could further affect how house prices in America will look after COVID-19. For that reason, it is essential for investors to keep up to date with the latest news for developments so they can plan accordingly for the future.
There is a further chance that the economic repercussions of this outbreak will be felt in the real estate market for a long time after it ends and that it will drip down to all facets of the industry.
The Silver Lining
Real estate is particularly a resilient asset class compared to other asset types and has recovered from serious disasters more than once before. The housing market has managed to return from serious recessions and has even seen housing prices increase during those tough times. We have no doubt that the market will regain its strength as it has in the past, even if it may take some time.
The good news is that real estate-based companies who have been able to translate their services online have been getting good responses, and this could be the push needed for much of the sector to modernize. Roofstock is one such company, seeing a huge increase in online traffic as investors look for new, less dangerous methods of real estate investing. Even the legal aspects of real estate are going online, with sellers, agents and attorneys increasingly using Docusign to sign closing documents. New Silver has always been a tech-first loan originator, and we will continue to explore ways to revolutionize private lending throughout this time.
In the short-term, investors can expect that home sales and housing prices will come down and the market will be better for buyers than it will be for sellers. Mortgage interest rates might come down in light of the pandemic, but this will not be enough to improve the market or motivate buyers to go out and make offers. The reality is that investors can further expect both closings and settlements to quiet down in the next few weeks as people put business on hold. Until the spread of COVID-19 is brought under control and the lockdown lifted, the economy’s turmoil will continue to foist the real estate market’s performance and knock investors.
That said, conditions will inevitably improve, and the real estate sector along with it. The real estate asset class is one of the biggest in the world and it has faced many challenges throughout history but has always recovered. This lockdown could have a silver lining, like the modernization of the real estate industry and the introduction of new ways to invest that don’t involve physical property.
Ultimately only time can tell what will happen, but if you stay level headed during these challenging times, the opportunities for buyers could explode when the dust from COVID-19 finally settles.