The Coronavirus pandemic (COVID-19) has drastically affected the entire world and altered the way 'normal' business is conducted. The real estate market's impact was no different, with home sales falling to lows not seen since the housing market crash of 2008. The pandemic has affected the market in several ways. First, the decline in demand during March and April as the virus started spreading, second, slow rise in demand as the FED interest rate was reduced to stimulate the economy, and lastly, the long term implications of the virus on the housing market.
Initial Outbreak of the Virus
The virus spreads with human interaction and contact and can be prevented by wearing a mask and following social distancing guidelines. As a result of the lockdown imposed in several states across the US, home sales started declining. Homebuyers stopped buying homes as they could not have in-person viewings, not meet agents and home-owners, and could not interact with inspection agents. These factors were a big deterrent for home buyers and led to a significant dip in demand. Home sales fell to 3.9 million from 5.7 million before the pandemic outbreak, which is a 32% decrease. Measures of home buying demand such as queries for homes, contacting agents, and search activity also declined during this period of April-May. The pandemic also created uncertainty around employment and GDP as many individuals lost their job once the nation went into lockdown, making it very difficult for individuals to save or even consider buying a home.
Existing listings were being removed, and new listings were not being added, which were down by 40% from the previous year in April. Supply is determined by the sum of existing and new houses being sold. In March, housing starts had declined by 22.5% compared to February, as builders expected lower demand. The supply of homes fell to a new low due to these factors, and sales fell.
Increase in Demand following FED Stimulus
The FED initiated two emergency rate cuts in March, and the FED Funds Rate was reduced to 0-0.25%, following which the Prime Rate was slashed to 3.25%. Apart from the rate cuts, the government provided a stimulus package to all individuals who lost their jobs during the pandemic, which helped increase spending. After the significant drop in May, the real estate market started picking up in the summer, reaching pre-pandemic levels as potential buyers restarted the home buying process once again. A big reason for this rise was the low-interest-rate environment, which led to increased mortgages and refinancing. Adjustable-rate mortgages that used the prime rate as a benchmark benefited from lower monthly mortgage payments. Slowly the buyer's market that was created in May was turning back into a seller's market. Pending sales were up by about 30% in August compared to the previous year's numbers, and home showings per listing also rose to the pre-pandemic level. A big reason for the increase was the relaxation of lockdown restrictions, mask usage, and people adapting to online viewings.
Although demand rose because of these reasons, supply did not increase at the same pace. New listings had little to no growth as compared to previous years, and inventory continued to decline. The reason for the limited listings is health concerns on the part of sellers and the inability to buy a new home in this uncertain economic period. Although there was a massive decline in demand, housing prices did not decline at the same rate. Prices remained steady through April and May due to the limited supply and low US mortgage rates available.
Long Term Outlook
The coronavirus had a drastic impact on the housing market; although the market bounced back, there will be long-term implications of the virus. Unemployment is still high at 7% and reached close to 15% in March. The economy deteriorated, with several businesses closing down, especially in the hospitality and travel industry, as they were the most affected. Looking back at the housing market collapse of 2008 as a reference, foreclosures and tighter lending practices made it difficult for individuals to buy homes; similar signs can be seen now. Low-moderate income earners will find it the hardest to purchase homes; government-backed loans such as FHA loans, VA loans, and USDA loans will be the best option.
Changes in consumer preferences will also affect how the housing market grows. As work from home becomes the staple, more individuals will consider moving away from the city core to the outskirts, searching for lower home prices. Commercial real-estate will also be impacted by these changes as most companies estimate workers will not be back in the office till summer 2021. Housing is a long-term investment for homebuyers, and changing supply and home prices will affect how homebuyers react in the future. Uncertainty regarding economic conditions makes it difficult to determine how the real estate market will modify or reverse back to pre-pandemic ways.