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You were browsing MLS listings and gearing up to begin your home search during the busy spring season. But then COVID-19 came sweeping across the nation, and your plans were suddenly put on hold. You still want to buy, but you’re wondering — is coronavirus going to impact real estate?
The coronavirus pandemic has come with a lot of unknowns. One of them is how the fallout from the virus will affect the real estate market. Without a crystal ball, it’s impossible to say exactly what the coronavirus pandemic will do to real estate — but we can make some educated guesses based on what we know about economics and the market in general.
Here are the variables to watch that will determine how coronavirus impacts real estate down the road.
We’ve seen a strong seller’s market over the past few years because there have been more buyers than homes for sale, but this might be changing.
Before the coronavirus hit, the percentage of agents characterizing their market as favoring sellers was already trending smaller as the year went on. In the first quarter of 2019, over 58% of agents said the market favored sellers. By the last quarter of 2019, that number was down to 48%. However, just before the virus hit, a poll of agents in February 2020 showed a whopping 77% of them classified the market as a seller’s market.
Of course, all that has changed now that the country has essentially shut down as we wait for the coronavirus to run its course.
Whether or not the market switches from a sellers’ market to a buyers’ market in the long term will likely be “based on the region,” says Anthony Sacco, an experienced real estate agent in Rehoboth Beach, Delaware, who also has a background in finance.
“In my region, if COVID-19 doesn’t continue much longer, I don’t see us moving out of a seller’s market here. We have so many people transitioning here from higher tax areas. But I do think you will have a movement from a seller’s to a buyer’s market in some markets.”
Sacco thinks that the kind of impact the virus will have on the market ultimately depends on the duration of the virus. “If we are held in our homes through May, I think the market will start to go backwards,” he says. “We’ve seen the stock market increase with the stimulus, but if we can’t get back to work in the next month or so, in some fashion you will see a big economic impact — it will be impossible for the market not to be impacted.”
The need for sellers to list
There’s no doubt that sellers have become a little wary of listing during the pandemic. “In general, we are seeing that sellers are more cautious about people walking through their homes and touching things,” says Jeremy Cupp, an award-winning agent in Fayetteville, Arkansas.
While that wariness is certainly keeping some would-be sellers from listing their homes, other sellers don’t have the luxury of waiting out the virus. Moves, divorce, death, or serious financial troubles will require some sellers to put their homes on the market.
If there are enough of those sellers (if, for example, the economic impacts are so widespread that a great number of homeowners can no longer afford their homes and sell or foreclose), it could shift the market to a buyer’s market nationally. But right now, “that’s all unknown,” says Sacco.
Even before the virus struck “we were already having a shortage” of home inventory, says Sacco. In the wake of the virus, that shortage has continued, and, in some places, it’s risen significantly.
Cupp says that in his market, they’ve seen a huge decrease in inventory. “Sellers are worried about folks who may be sick walking through their homes and getting them or their families sick.” When it comes to listing their homes, “a lot of sellers are holding off,” he says.
Other sellers are hesitant to list because they believe the virus is preventing people from buying. But that’s not the case in Cupp’s market, he says. “Sellers are getting into multiple-offer situations more frequently now because of the shortage of inventory.”
On the other hand, “we have maybe 50% to 60% of the buyers that would normally be looking at this time,” Cupp says. If enough buyers drop out of the market — but not as many sellers do — we could see inventory increase.
However, until inventory levels go up, prices are unlikely to change significantly.
“Home prices have been steady so far,” says Sacco. “We haven’t seen significant price dropping at this time. I’ve had a couple properties go under contract, and they were at or close to list price.”
Low mortgage rates can spur buying activity, and high ones can inhibit buyer activity. In the past few years, mortgage rates have been historically low — hovering around 4%. In mid-April, mortgage rates hit a 30-year low, falling to 3.45% for a 30-year fixed-rate mortgage. Even with the extraordinarily low rate, mortgage applications were down 35% from a year prior.
Despite the recent economic turmoil, “mortgages are still being funded,” says Sacco, though some specialty products like “your high-dollar loans or your bank statement programs for the self-employed” aren’t being funded as they were before, he says. “But Fannie and Freddie loans are still funding. USDA is still funding, and so is FHA.”
Lenders are tightening their belts, though. “A lot of lenders are raising their minimum requirements for buyers,” says Sacco. “I see that some have a minimum credit score of 650 and 660, and some are 700 or greater, and that’s affected some buyers.” Before the virus, Sacco says that he saw minimum credit scores as low as 580.
Even if there aren’t a lot of traditional buyers in the market, fix-and-flip or buy-and-hold investors still might be active and keep the market moving for sellers — especially in areas where rent has been rising or is stable.
“In the last few years, it has been difficult for flippers to find properties that they could flip because pricing had moved up so much in my market,” says Sacco. Even with homes that needed work, there wasn’t enough room in price for investors to make a profit, he says. “Regular buyers were buying things that a flipper would normally buy because there was no availability in the market.”
Sacco says that it’s likely that flippers will see an advantage once everything settles and we have a better idea of how the coronavirus will impact real estate. “There will be more inventory,” he says. “Even with everything the government is doing, there’s no way there won’t be an increase in foreclosures in the market, and with an increase in foreclosures, there are a lot of homes that will be sold as-is.”
In the past few years, Sacco says, when banks foreclosed on homes, they spent some money to fix them up because they could make a good profit by doing a little work — effectively cutting flippers out of the equation. But if things change drastically with the market, flippers will no doubt be able to grab some good deals.
In general, people don’t want to buy things — especially enormous things like houses — when they are nervous, and that anxiety may keep buyers away from the market.
The Fannie Mae Home Purchase Sentiment Index, which measures consumers’ current views and future expectations of the housing market, fell 11.7 points in March, its lowest reading since December 2016. “Attitudes about the current home-selling environment [have] deteriorated markedly,” Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae, said in the report. Americans cited COVID-19-related concerns about losing their job as one of the main reasons for their pessimism.
“I have buyers who are too anxious to buy,” says Cupp. “I have one client in particular — he backed out of the contract because he was worried about how the virus will affect the economy.”
Cupp says some of his buyers have been directly impacted by the virus, too. “I do have buyers who have been put on furlough — though the idea is that they will have their job again once the stay-at-home orders lift and we can start looking again,” he said.
But while some of his buyers have backed away from the market, Cupp says he still has a lot of buyers who aren’t worried at all. At the end of the day, Cupp is optimistic. “When the virus lifts, I feel like the market in our area is going to explode.”
Header Image Source: (Francesca Tosolini / Unsplash)