Summary: In this article, learn why the demand for housing is rising with the economy reopening. Topics also include, why home prices are rising during the COVID-19 pandemic, homebuilders regaining confidence, low mortgage interest rates and the changing landscape of office workers.
Introduction
There was already a huge demand for affordable housing before the COVID-19 pandemic hit and almost knocked the Earth off its axis. As businesses across the United States slowly begin to reopen their doors and welcome employees back to work, the need for an affordable place to live is greater than it’s been, maybe ever. After seeing a huge drop in inventory, the number of houses on the market has slowly started to increase as some of the initial panic begins to subside. Will reopening the economy bring even more demand for housing? Will home prices continue to rise even with a pandemic? Will there be more homes built to meet demand?
Experts in the real estate industry are making predictions about many of these questions, but many unknowns still loom. Only time will tell as we watch the long-term effects of the Coronavirus outbreak over the next several months. Right now, learn about what’s happening and what real estate investors should potentially expect down the road.
Why Home Prices are Rising During the Pandemic
With the exception of the Great Recession in 2008, history proves that during pandemics and recessions, home prices actually go up from the beginning of a downturn to the end of a downturn. That’s exactly what’s happening in certain markets across the country, even during the COVID-19 pandemic. Here are a few reasons why…
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Scarcity of Homes For Sale
The biggest dip (about 52%) we’ve seen in national housing inventory during the COVID-19 pandemic occurred last month. In New York and Philadelphia, listings dropped around 90 percent compared to last year. Real estate operations have essentially stopped in these markets.
Inventory has recently started to come back a little bit, but it’s still down 38 percent year over year. However, average home prices this year are consistently higher than prices last year. What’s causing that to happen? Scarcity.
Why the scarcity of homes for sale? In a recent webinar hosted by RealWealth®’s Kathy Fettke, real estate experts, Rick Sharga and Daren Blomquist share their insights and predictions on where the housing market may be headed due to the Coronavirus.
Blomquist explained that sellers are afraid of the market because there’s still a lot of uncertainties and unknowns. The initial shock of COVID-19 hitting has caused a lot of people to hold off on selling their homes, at least until the market settles down. The good news is, Blomquist says he’s started to see the number of for-sale homes rise over the past couple of weeks. However, a high degree of uncertainty still exists.
High Demand For Affordable Housing
In 96 percent of metropolitan areas around the United States, single family home prices actually went up year over year during the first quarter of 2020. Compared to 94 percent in Q1 of 2019.
Additionally, home prices increased at a rate of 7.7 percent since the first quarter of 2019. The national median home price of single-family homes at the close of Q1 2020 was $274,600.
Forty-six metros experienced double digit increases including, Boise, ID, Eugene, OR and Colorado Springs, CO.
Chief Economist at NAR Lawrence Yun explains, “The first price jumps mostly reflect conditions prior to the Coronavirus outbreak and show the strength of the housing demand prior to the pandemic. Even now, due to very limited listings, home prices are showing no signs of buckling.”
In order to help the economy recover faster, we need a much bigger supply of affordable housing and listings.
Record-low mortgage interest rates have made it more affordable to buy a house right now.
Strong Reverse Lending Market
Low interest rates, high home prices, and lenders giving out fewer loans may lead to a strong reverse lending market.
Housing Wealth at All-Time Highs
The value of homes over the last 20 years has more than doubled since 2000, according to CoreLogic’s national Home Price Index. Borrowers who have lived in their home for about 20 years home values went up 113%.
A HECM loan or Home Equity Conversion Mortgage is the most common reverse mortgage option in the U.S. The only catch is that you must be 62 years or older to qualify. With an HECM loan, homeowners get access to a portion of their home equity but don’t have to give up ownership or take on a monthly mortgage payment.
Double the Benefits of Low Mortgage Rates
Reverse mortgages allow borrowers to maximize the cash value (or principal limit: the discounted value of the property’s current appraisal) of a property when interest rates are low. The lower the interest rate, the larger the present loan-to-value proceeds are available to the borrower.
No Credit History or Score Required
These times of uncertainty during the COVID-19 pandemic has caused lenders to tighten their credit standards, making it more difficult to qualify for a mortgage loan. It’s especially difficult for those that have just lost their job and income.
FHA-insured HECM loans make up 95 percent of the reverse mortgage market–supported by Ginnie Mae. These lenders don’t look at the borrower’s current income or credit score. Borrowers are only required to prove that they are financially stable enough to keep up with property taxes and insurance.
Homebuilders Regaining Confidence
New construction, permits and completions have all declined over the last month amidst the pandemic. New construction on single-family housing dropped over 25 percent between March and April of 2020. Single-family building permits were 24.3 percent lower and home completions dropped 4.9 percent.
However, we’re beginning to see builders regain some of their confidence. Homebuilder confidence has already increased in May and with super low interest rates, there’s been a jump in applications. This is a good sign that people may be looking to get back into the buying market again.
“Over the past week, quarantine restrictions continued to loosen across the country, with most states partially reopening,” says Senior Economist at Realtor.com, George Ratiu.
“In addition to a sobering number of lives lost from the coronavirus, the economic toll from the past two months is staggering. The number of jobs lost just in April rivals the number of jobs created during the past 10 years combined,” he said.
With more and more companies offering extended or permanent work from home options until at least 2021, it’s likely there will be a shift in what buyers and renters are looking for. There is already a demand for more space, outside of crowded and overpriced city-living and this trend is expected to keep picking up speed.
Single-family and multi-family homebuilders should be looking for opportunities to fulfill these changing preferences in homebuyers and renters.
Optimism & Skepticism for the Future of the Housing Market
Home sales have definitely slowed down during the COVID-19 crisis. But many real estate experts are already expressing optimism about what may be ahead. CEO of Zillow, Rich Barton shared that they were already seeing an increase in demand from buyers as well as traffic to their website.
One thing we’ve always believed, and confirmed again over the past two months, is that real estate is resilient,” says Barton in a letter to shareholders. “People still need to move–and dream of moving, perhaps now more than ever.”
Many data sources indicate that real estate transactions in April 2020 may be the lowest we see moving ahead.
Zillow recently released an article forecasting a decrease in both home sales and prices for the rest of this year. The article also breaks down optimistic, medium and pessimistic scenarios for future home sales and appreciation. Including details about what they expect to be the most likely scenario.
Rental Demand Should Remain Stronger Than Ever
The majority of people who have lost their jobs due to the pandemic are renters, not homeowners. Workers in the service industry are among those that have been hit the hardest. Whether or not this population of people had plans to buy a home anytime soon, it’s likely these plans will be put off indefinitely. There’s a lot of the carnage right now among the renter community so the rental market should continue to see high demand.
The reality is, some jobs aren’t going to come back and with over 36 million people losing their jobs during the pandemic, there will inevitably be some negative long-term effects across multiple industries. We just don’t know exactly what that will look like.
Short-Term Rentals Are in Trouble
Real estate investors that bought a property as a short-term rental Airbnb or vacation property may soon be finding themselves in deep water. Tourism around the globe has taken a nosedive and most summer travel plans have been postponed until at least next year, thanks to COVID-19. A lot of these property owners will be forced to sell with no people visiting their short-term rental.
The Distressed Housing Market is Scarce Due to Foreclosure Moratoriums
The distressed housing market (any property that is under foreclosure or being sold by the lender) also has a huge scarcity of inventory because of current foreclosure moratoriums caused by the Coronavirus. But there may still be some opportunities for investors to buy in markets around the country.
When foreclosure moratoriums lift, should we expect a spike in listings? According to Blomquist, a specialist in distressed housing, there shouldn’t be a spike in listings right away.
That’s because there are two layers of distressed properties–the first is moratoriums and the second is forbearance. Both of these timeframes will protect mortgage holders for an extended period of time (up to two years). There will be more inventory down the road, the question is when?
“When forbearance is up, we should see that pent up inventory hit the market at some point,” says Blomquist.
Record High Equity Levels Could Help Homeowners Avoid Foreclosure
There’s a record level of homeowner equity in the market today. At the close of Q4 of 2019, national homeowner equity collectively increased $489 billion, at a rate of 5.4 percent year over year.
In our webinar, Rick Sharga explained how distressed homeowners can avoid foreclosure. Basically, moratoriums and forbearance options are meant to give homeowners and renters enough time to resurrect their loan. If they are unable to, the extra time may allow them to sell the home while there’s still equity in it. And ideally walk away with a chunk of money in your pocket and a fresh start. Rather than going through the foreclosure process and having that on your record for the next several years.
A Shift in the Office World
Google, Twitter, Facebook and Microsoft are allowing their employees to work from home until the end of this year or longer. Businesses are saving tons of money on overhead simply by having employees work from home. As long as productivity stays consistent, this may likely become a more common trend. Additionally, many businesses are realizing that they can pay a remote worker who lives in Nebraska much less than an employee living in New York City. This shift could play an interesting role in both commercial and single-family housing markets around the U.S.
Conclusion
The demand for housing is rising as the economy reopening, many businesses are starting to reopen and some employees are going back to work. Life has far from returned to normal, but we are seeing some glimpses of what our future “normal” may look like. Because demand for affordable housing was already high prior to the COVID-19 pandemic, it’s really no surprise to see this trend continuing.
The good news is, homebuilders are regaining their confidence and new construction is in the pipeline. Real estate investors should sharpen their pencils, do extensive homework, and take advantage of the increasing demand for single-family and multi-family rentals. Now and in the near future may be a great time to buy, if you buy smart.
