Summary: In this article, learn about the potential long-term impact of COVID-19 on the real estate market. What’s happening right now and what may happen in the future.
There’s been a ton of focus on the short-term implications to the real estate market due to the outbreak of the COVID-19 pandemic. Missed rents, rent strikes, vacancies, and a slowdown in demand has likely been keeping a lot of landlords up at night. And with an impending recession in 2020 looming, investors may now be starting to think about the long-term impact of COVID-19 on the real estate market. What’s the next decade going to look like?
Next, we’ll talk about ways COVID-19 could impact the real estate market long-term…
Short-Term Deflation, Long-Term Inflation
Trillions of dollars are being printed by the government since the Coronavirus shut down most of the country. Many businesses and workers that have been affected by the pandemic are receiving relief checks in the mail to offset losses in income and revenue.
For the short-term, we may see some deflation because demand has dropped significantly in a lot of industries–empty seats on airplanes, new cars crowding dealership parking lots, etc. But as stay-at-home orders have started to soften in May, demand should slowly pick back up and we’ll likely start seeing inflation over the next few years.
The good news for investors is that real estate usually fights inflation. It allows investors to pay off mortgages with inflated dollars (depreciating debt), it raises rents and property values and it generally appreciates faster than inflation rates.
What happens to inflation during a recession?
A recession and inflation may sound like a bad pair but they’re actually a great couple! Recessions cure inflation. So even though we’re headed into a recession, it should help keep long-term inflation down.
Another “Lost Generation” May Bring Even More Renters
People graduating from high school or college in 2020 won’t be attending their graduation ceremonies. Celebrations have either been postponed or held via Skype from the comfort of their homes. It’s a tough pill to swallow for those who have worked for years to earn a diploma or degree, and now can’t be publicly recognized for it.
Back in 2008, the housing market tanked and the stock market soon followed. The Great Recession set in and thousands of people lost their jobs and then their houses. While all this was happening, there was an entire generation of millennials thrown into the workforce…like me.
I finished with my undergrad at the end of 2009 and promptly moved back in with my parents. The job market was bleak and when I was finally offered a position, I took it, even though it wasn’t a job I actually wanted. Times were tough, but I was lucky enough to graduate without student loan debt and find a job within a few months, so times were a lot tougher for others.
During this economic downturn, millennials with shiny, new degrees found themselves either unemployed or employed but barely making enough to cover their bills, let alone student loan debt.
As summer approaches, 2020 graduates may start to realize that not being able to celebrate with friends and family could be the least of their worries. With 20 million Americans getting laid off in April from the spread of COVID-19, unemployment rates haven’t been this high, 14.7 percent, since the Great Depression.
It seems likely that there will be a replay of what happened to millennials in 2008. Only this time, the New Silent Generation (or Gen Z) may suffer the most.
While the Coronavirus hasn’t put most of us in an ideal situation, landlords should benefit as this upcoming generation will probably be renters for much longer than they otherwise would. Thanks to COVID-19, we expect real estate investors to have a larger pool of renters over the next decade.
More Federal & Local Government
Since the pandemic, we’ve seen an uptick in both size and power of local and federal government. To help us through the current crisis, the government has released extensive relief packages. But two months into the pandemic, more people are looking ahead and wondering if more relief is coming and what life will look like long-term.
Our “essential workers” have been on the front lines throughout the Coronavirus outbreak (BIG thank you). The problem is that many of these workers are some of the lowest paid. Grocery store clerks, health care workers, public transit drivers, trash collectors, etc., are all in high risk industries. These workers will continue to struggle financially unless additional money from the government is provided.
Home Price Growth Should Slow
Spring is typically one of the busiest seasons in real estate. Not this year. CoreLogic’s Home Price Index predicts home prices to increase at an annual rate of 0.5% from March 2020 to March 2021. Just a year ago, from March 2019 to March 2020, home prices grew at an annual rate of 4.5 percent. This is obviously a big slowdown in growing home values.
Home prices continued their slow down in April, reporting only 0.3% in growth.
The 100 largest U.S. metros were analyzed by CoreLogic based on housing stock (the number of apartments and houses in an area) as of March 2020. Of these 100 metros:
- 32 percent have housing stock that is overvalued
- 31 percent were undervalued, and
- 37 percent were at market value
Which Markets May See the Biggest Decrease in Home Prices?
The Houston metro may see the biggest decline in annual home prices. Compared to last year, there’s already been a 2.6 percent decline.
Miami and Las Vegas metros may see a dip in home prices but it should be less significant.
Interestingly, in San Diego and San Francisco, the price of homes is projected to increase 8.8 percent and 11 percent, respectively.
What Happens to Home Prices in a Recession?
The Great Recession of 2008 was an anomaly because the housing market crash caused it. In 2020, experts don’t expect the recession to cause a housing market collapse. The real estate market today is much different than it was 12 years ago. Mortgage loans are more solid, home equity remains high, there isn’t enough housing supply to meet demand and there’s a lack of affordability.
While there shouldn’t be any sort of big real estate market downturn, recessions often result in fewer people looking to buy homes. As demand shrinks home prices are pulled down with it. However, thus far, we’ve seen a big slowdown in appreciation, but a much smaller dip in overall home prices.
If or when home prices go down, it’s usually a great time for real estate investors to find excellent deals.
Real Estate’s New Virtual Reality
There’s already been a huge shift in many of our work lives as we’ve transitioned to working remotely. It’s forced people across multiple industries to adjust quickly. Industries that may have been a few years behind technologically (ahem, education), have had to take everything online.
Teachers have had to adapt lesson plans for a virtual audience. Real estate investors and agents have also made adjustments in order to keep business operations up and running. The real estate industry has actually adapted really well with all the quarantine restrictions in place. Realtors, rental property managers and investors have come up with new ways to virtually show, rent and sell homes. 3D tours, virtual presentations, video streaming, and online closing processes are just a few of the ways real estate has kept rolling, even during the pandemic.
There’s even been drive-by appraisals of properties under contract. Where the appraiser will rely on pictures, videos and virtual tours, rather than having to be inside the property. It’s not ideal, but it’s one solution.
Peggy Olin, President and CEO of Miami’s OneWorld Properties says,
“Real estate is still a long-term investment, not a short term one. There are many buyers that even now are suddenly empty nesters or need to downsize or the opposite–get into a larger home because they have a growing family. Whichever the case, many buyers have to continue moving forward with transactions. Real estate is still a hot market.”
SFRs May See a Drop in Demand For the Medium-Term
For the last 10 years, a lack of supply coupled with high demand has been driving up rent prices for Single Family Rentals, according to CoreLogic.
Principal economist at CoreLogic, Molly Boesel explains, “Single-family rents were on the rise early this year, prior to the COVID-19 outbreak across the country. In the coming months, the virus’ impact on the rental market will become more apparent. Uncertainties surrounding job security and shelter-in-place mandates could lessen rental demand in the near term. However, as we look ahead to an economic recovery, consumers may begin considering single-family rentals over multifamily options to provide more space for at-home offices and distance from other housing units.”
For the long-term, demand should come back up, perhaps even stronger than before the pandemic.
Home Sales Could Keep Going Down
Home sales went down halfway through March when most of the country started going into quarantine with the fast-spreading Coronavirus.
But people who were looking to sell or buy a few months ago, before the Coronavirus hit, are likely still planning to do so, just maybe not right now. What this could mean for the real estate market is that the number of homes sold may level out for a while. But long-term, it always bounces back.
There’s a whole list of reasons that cause people to buy or sell their house, even during times of uncertainty. Births, deaths, marriages, divorces (maybe more now than ever!), etc., continue to happen and people sometimes need to change their living situation, regardless of market timing. The fact is, life still goes on, even amidst a global pandemic.
The number of homes sold over the last two months has slowed and may continue to trend that way for a while. But long term, expect to see more people back into the real estate market and a rise in home sales.
Delinquencies on Mortgages Could Increase
Before COVID-19 hit and the recession began, mortgage delinquency rates were the lowest they’ve been in 21+ years. Since February 2019, delinquencies on loans decreased 0.4%. In February 2020, 3.6% of loans were delinquent, while in 2019 the rate was 4.0%.
Foreclosures usually increase during recessions as unemployment levels rise, more and more people find themselves unable to cover their mortgage. Unemployment rates have spiked dramatically and when mortgage relief options run out, some mortgage holders may find it impossible to pay back.
Low Mortgage Interest Rates Should Drive the Refinance Market
The Federal Reserve cut mortgage interest rates in January 2020, which triggered an increase in homeowners applying to refinance at lower rates. With the Feds dropping rates once again in March, it looks like this trend may continue in the next several months.
For those looking for some extra cash for whatever comes next, people may opt for a cash-out refinance at a lower rate.
The Vacation Rental Industry is Toast
Reservations for short term rentals during the upcoming summer season are down 75 percent compared to last year. It seems realistic to assume that short-term vacation rentals won’t start to recover until at least next year.
Low-income and “vulnerable communities” are getting hit the hardest during COVID-19. So talks of some type of rent control have been swirling. Eviction moratoriums will be lifted at some point, so long-term solutions like rental debt forgiveness or eviction freezes could be considered. We’ll see what happens…
Student Loan Forgiveness
Potentially some good news for those with student loans. Just this week, the Health and Economic Recovery Omnibus Emergency Solutions Act or HEROES Act was proposed by Democrats in the House of Representatives. The act proposed a certain amount of student loan forgiveness and a longer pause on payments and interest waivers.
Some of the specific details include up to $10,000 of student loan forgiveness on both federally-backed and privately-held loans and no recertification for income-driven repayment plans until 2021.
Minimum Wage May Increase
Amazon raised their minimum wage by $2 an hour and doubled their overtime pay during the pandemic. But this pay hike is set to expire at the end of June. Right now, federal minimum wage is $7.25 an hour, with higher minimum wage in 29 states. But there are many concerns surrounding whether increasing minimum wage is a good idea in the long run.
Many businesses are bleeding money and may be less inclined to bring employees back at the same par rate, let alone more money. Especially when they’re struggling to stay afloat themselves. Business owners may opt to hire new employees at a lesser wage following the pandemic. Raising minimum wage at the beginning of the last recession proved to negatively impact both employment and income growth of low-income workers. The same thing could happen in 2020.
In response to the COVID-19 pandemic, the federal government has spent around $4 trillion in relief packages. This just adds to our national debt, already deep in the red. Economists are suggesting that sales and income taxes may increase to make up for the money lost during the pandemic.
The Industrial Real Estate Market Could Benefit
Interestingly, the industrial real estate market is really well. Seeing big increases in demand since the COVID-19 outbreak from grocery stores that are in need of refrigerated warehouses. The influx of online sales during the pandemic has created even more demand for space. Online retailers in general are renting additional warehouses to keep up with fulfillments.
The New Definition of “Home”
The pandemic has forced people to stay home, and thus slow down. Taking a closer look at the finer details of their everyday living environment. The Coronavirus has redefined the value of a home. People want more out of where they live, now more than ever. More space indoors and outdoors, decks, patios, etc. People want a comfortable, safe place to call “home” and have it actually feel like home.
I heard on the radio yesterday that a lot of companies have decided to allow employees to work from home permanently–if they want to. With the huge amount of people now working remotely (there’s even a hashtag trending: #WFH), expect home offices to be a must-have amenity moving forward. As well as touchless technologies in multi-family buildings to minimize the risk of future spread.
What If the Coronavirus Makes a Reappearance in Six Months?
Some health experts are predicting a second, even stronger wave of the Coronavirus to hit this fall and winter. Dr. Robert Kim-Farley, an epidemiologist and infectious disease expert from UCLA said, “It’s possible that this second wave won’t even wait until the fall–it could be that simply we relax our physical distancing too soon.”
If we do get hit with another wave of the Coronavirus, it will likely extend the recovery period of the economy–keeping us in a recession longer.
How long will it take for the economy to recover? We asked our members and the results are interesting!
It’s hard to say just how deep and wide the long-term impacts of COVID-19 will be on the real estate market. Most experts think the residential housing market will bounce back pretty quickly. But will real estate ever fundamentally be the same again? Some of the long-term impacts will affect real estate investors, while others won’t. No one knows for certain how this will all play out, but if these trends materialize, there may be more inflation, more renters, more government, fewer home sales and a redefining of “home” in our future.