U.S.News & World Report | April 2, 2020
Devon Thorsby
The coronavirus pandemic has thrown a wrench into all facets of life, including paying rent or the mortgage for some, and for those in a better financial position, buying a home, selling one or moving to a new rental.
Stay-at-home orders and calls for social distancing have ruled out in-person home tours, and closed courts mean your local clerk's office can't process new property deeds.
While many people are choosing to delay a home purchase or sale and stay in place until the coronavirus pandemic has subsided -- whenever that may be -- others are still buying, selling and signing new leases. But as economic uncertainty and personal financial concerns grow, experts see some changes ahead in the housing market even after the threat of COVID-19 has peaked that will affect buying, selling, renting and new construction.
Here are some changes experts see on the horizon for the rest of 2020.
Buying
At the start of 2020, many economists expected homebuying to remain healthy throughout the year, bolstered by fairly low mortgage rates -- below 4% -- though held back slightly over concerns of a future recession to occur in 2021 or later.
When the coronavirus first caused stock markets to drop dramatically and the spread of COVID-19 led to widespread school and business closings and calls for people to remain in their homes, mortgage rates initially dropped in lenders' efforts to offset the scare.
On March 4, Freddie Mac reported the average 30-year, fixed-rate mortgage interest rate hit a historically low 3.29%, which led to a flood of would-be buyers and homeowners rushing to apply for a mortgage or refinance. Overwhelmed by interest, lenders raised rates slightly to 3.65% on March 19, but they have since fallen again to 3.33% as of April 2, according to Freddie Mac.
Even with the temporary increase, mortgage rates are now more than 0.5% below the rate at the same point in 2019, and they are well below rates from a historical perspective.
Unfortunately, low interest rates haven't been able to sustain homebuyer activity. While it's unclear whether this is primarily due to orders to remain at home or concerns about financial stability and employment -- it's likely a mixture of both -- homebuyer activity has dropped dramatically. In a survey of more than 3,000 Realtors conducted March 16-17 by the National Association of Realtors, 48% reported a decrease in homebuyer interest due to the coronavirus outbreak.
"We've seen the impact of activity from all of this, so of course it's not business as usual ... but by no means has it stopped entirely," says Skylar Olsen, director of economic research for real estate information company Zillow.
Experts aren't able to analyze many historic examples to show us how the market will react in the course of the pandemic and over the long term; the housing market is very different from what it was more than 100 years ago during the Spanish flu pandemic. Olsen notes the SARS epidemic that occurred in China starting in 2002 would serve as the best example.
During the SARS outbreak, Olsen explains, there was a marked drop in real estate transaction activity in affected parts of China like we're seeing today in the U.S. Here, buyer activity fell first and fastest where the virus initially appeared and where isolation measures were first instituted -- in Seattle, then San Francisco and much of the rest of California.
One hopeful takeaway from the SARS epidemic is that home prices, and the housing market in general, weren't impacted significantly in the long run. Once the epidemic subsided, homebuyer and seller interest returned fairly quickly, Olsen says.
"What's happening to us right now is not being driven by a market failure," Olsen adds.
The question of the scale of impact that the housing market and the economy will see hinges on how prolonged the spread of COVID-19 will be. "If it lasts too long, will people's affordability be completely eroded?" Olsen asks. If so, the recession we reasonably expect now due to the temporary decline in productivity and activity will become what Olsen refers to as a "real recession," where returning to previous levels of productivity and activity will be much harder.
Selling
As homebuyer activity has dropped significantly, many sellers have decided to delay putting their homes on the market, both to continue social distancing and eliminate the need to move in the middle of a pandemic.
However, not everyone has the luxury of waiting. Fortunately, all is not lost. Daniel de la Vega, president of ONE Sotheby's International Realty in Coral Gables, Florida, says that while activity has decreased, agents are still showing homes -- by video tour -- and homes are still going under contract.
Zillow reports that the last week of March, compared with the average from February, saw a 408% increase in users making 3D videos for homes on the market that aim to immerse prospective buyers and recreate the feeling of touring a home in person. Such videos have actually been a nationwide feature on Zillow's website since 2019, but are no longer a "niche product," Olsen says. "It's what you need if you want to keep getting your home through (the sale) process," Olsen says.
Right now, the challenge is to make sure homes that are on the market don't linger. Real estate listing agents are highly focused on "making sure they price these home appropriately so they don't sit on the market too long," de la Vega says.
The outlook for home sellers after the pandemic, like with buyers, depends on how long quarantines and the spread of the virus last. As more homes that would have been on the market at the start of spring remain unlisted, we can expect to see more go on the market shortly after the pandemic ends.
The more financially strained homeowners are, the more houses you're likely to see for sale and the fewer buyers there will be, which is typical of a market at the beginning of a recession. Buyers who aren't affected by layoffs and have enough savings to afford a down payment will benefit.
"I expect prices to go down a bit after this, and I expect people to be able to buy maybe their dream home that they wouldn't be able to buy before this," de la Vega says.
Sellers who are interested in a quick real estate deal through an iBuyer, like Opendoor or Zillow Offers, will have to wait. Both Opendoor and Zillow Offers, as well as similar firms, have paused transactions. This reduces the chances that iBuyer employees are exposed to COVID-19, and it also reduces the chances of mass attempts to liquidate homes for cash in a financial panic.
While de la Vega says he is preparing his agents to work through a worst-case scenario housing crisis, he remains optimistic that the housing market won't suffer too long. "I don't think that prices are going to go down as drastically as people think," he says.
Renting
Renters are expected to be especially hard hit since they account for much of the workforce affected by closed businesses, reduced hours and layoffs.
Many first-time homebuyers who are holding off on a home purchase remain renters for now. This means rents are likely to rise in the near future due to continued demand. However, the financial uncertainty caused by COVID-19 is leading to both government and public pressure for landlords to give tenants suffering illness or job loss a break.
The U.S. Department of Housing and Urban Development has placed a moratorium on evictions for all rental properties insured by the Federal Housing Agency through mid-May. Governors and mayors throughout the U.S. are following suit and halting evictions as well, and some sheriff's departments are announcing that they will stop carrying out lockouts for the time being.
Even where evictions haven't been officially halted, many states have closed courthouses as a precautionary measure to prevent further spread of the coronavirus, effectively stopping eviction proceedings.
If unemployment remains high in the immediate aftermath of the pandemic, landlords can expect further regulation to help renters get back on their feet and avoid eviction.
Luxury apartment building projects may be put on hold if affordability becomes an issue, says Barry LePatner, a construction attorney and advisor, and author of "Broken Buildings, Busted Budgets: How to Fix America's Trillion-Dollar Construction Industry." This is because both developers and their lenders will question whether people will be able to afford to pay sky-high rents for luxury amenities.
For now, some renters appear willing to find a new rental as planned, regardless of the pandemic. In a survey of about 7,000 renters on rental listing and information site RentCafe.com between March 25-27, 52% said they still plan to move as soon as they find an apartment, and just 10% have chosen to put their search on hold.
While affording rent may become a long-term issue if unemployment remains high, landlords of mid- and low-price apartments can expect healthy demand, as people who would otherwise break into homeownership remain renters.
New Construction and Development
Since the Great Recession, residential construction has struggled to meet demand, contributing to climbing prices for existing homes throughout the U.S. Slowly, new construction has been ramping up: In 2019, there were roughly 1,370,300 new building permits for privately owned housing -- the highest number since 2007, according to the U.S. Census Bureau.
Of course, the coronavirus pandemic changes the outlook for residential construction entirely. In particular, many states and cities have taken widely varied stances on whether residential construction is considered an essential service that will continue throughout the pandemic. California and Ohio are two states where residential construction continues, while in New York and the city of Boston, construction has stopped or is limited to roads, bridges, health care facilities and other projects considered part of emergency needs.
Where construction continues, workers are concerned for their safety, as many on-site tasks require workers to operate close together.
Inconsistent policies from state to state could lead to vastly different outcomes in terms of available new housing when the pandemic subsides. "The world will be a different place insofar as the real estate, development and construction industries are concerned,"LePatner says.
LePatner says lenders are already being more cautious about the construction and development projects they consider for loans; they don't want to lend to a project that will struggle to attract tenants or buyers in this changing economy.
A key concern in the industry is the fact that construction laborers will have to find new work -- 91% of construction workers in the country work for companies with 20 people or less, LePatner says, and those local small businesses are most at risk. "(Construction is) a real mom-and-pop shop industry," LePatner says.
LePatner points to what occurred during the Great Recession, when many construction workers left the industry altogether for lack of available work, and says we can expect a construction labor shortage if prolonged isolation and economic concerns stop construction on a large scale for long enough to make workers seek jobs elsewhere.
