How Does The Corona Virus Affect Real Estate – written March 2020
A number of people seem to assume that we are heading for a recession and that home prices will fall significantly. Just this week I have had a dozen or more calls/texts from Realtors, business owners, friends, etc. as to if the housing market would crash or be drastically impacted. The first assumption is quite reasonable regarding a recession. The second assumption is based on fear and has minimal data to back it up in regards to a crash. Obviously, anything can happen in an uncertain and disrupted world especially with peoples work being affected, but a fall in home prices is still looking unlikely from today’s numbers. A simple supply and demand analogy can illustrate that, but let’s dive a little deeper into the why.
THIS IS NOT A REPEAT OF 2008. In 2005 the housing market began to sicken because homes were being used as future commodities and not for places to live. People owned homes with nobody living in them and 100% debt on top of them. The housing industry (and more particularly the lending industry within it) was a large reason for the 2008 recession with Phoenix Metro being one of the hot spots. Compare 2008 to a massive tornado that came out and just destroyed everything in its path.
Jump to 2020 and the housing market is more of an innocent bystander to a possible recession caused by a pandemic where a rebound should be swift and bountiful. Think rather than tornado a really big snow storm that shuts things down for a bit. It is the polar opposite to 2008’s endless excess of inventory with the current extremely low levels of inventory in 2020 and homeowners with large amounts of equity. What do people do after the snow melts? They come out by the masses to enjoy the sunshine… Think of a kinked hose and the pressure it builds.
Even if people lose their income and can’t pay their mortgages they can still find a buyer to access their equity and stay afloat, again another far cry from 2008. Foreclosures are less likely (although they will surely happen) as home owners can access that same equity to satisfy a debtor, not to mention the discussed government enforced suspended payment option, with no penalty from said debtors (think what Europe did). The biggest issue for real estate is employee furloughs where they will no longer qualify for a specific loan, at least for now.
In 2020 builders are likely going to be forced to build fewer homes than they wish because of shortages of labor and materials not so much from the pandemic but previous tariffs and shortages based off demand. A successful vaccine for the novel corona virus is more likely to appear before a surplus of homes could possibly develop. To note it sounds as if one is hopefully on the way (good news about COVID-19: https://rem.ax/2Ww6DyX).
What again about the people out of work? First we need to find a way to help one another, be it sharing our food or goods or monetarily donating where we can. Secondly according to a local research and economist firm “Because the virus has not been contained yet, except in several parts of Southeast Asia, we are likely to see a lot of people out of work. These people are more likely to be renters rather than homeowners. Landlords may find it much harder to collect rents and the yields from their portfolios are likely to fall. Some may decide to sell their properties. At the moment the extra supply would be welcomed and receive multiple offers, even in these troubled times. The potentially displaced tenants still exist and therefore still represent demand for shelter of some sort. There will be hardship, but not a flood of homes with no-one to live in them.”
In 2005 we were building homes for imaginary people, in 2020 people are moving to AZ daily and creating a demand for housing. As long as our weather stays great, the hurricanes stay away, and Californias taxes stay as high as their surfers, this trend should be one that continues. Sorry about the colorful humor Mom 😉.
It would be irresponsible not to acknowledge that COVID-19 will not have some sort of affect on the market, I am sure it will, but nothing that should cause panic, a swell of homes on the market, or massive foreclosures. It may cause a slow down but nothing crippling by any means and something that will quickly be forgotten with a vaccine for the virus or success of appropriate health measures.
Demand has however gone done and supply slightly up but supply only slightly. A fall in demand, however severe, is not sufficient to drive prices lower. There has to be an excess in supply relative to that demand.
Most NON-QM loans are being shut down (your jumbo or non traditional loans) which could have a trickle down affect. A jumbo loan is anything financed over $510,400 in Maricopa County. This can be evaded though but two traditional conventional loans on the same purchase or sufficient downpayment to bring the loan amount down to $510,400. The NON-QM loans will mostly be affected for bank statement loans or truly non-traditional. Your larger banks such as Chase and Wells however are still doing Jumbo loans because they service their own.
All indicators are that the AZ housing market remains mostly healthy and robust. There may be some who choose to sit on the sidelines but this just gives others the opportunity to get their offer accepted where maybe competition would have pushed them out previously. I have three buyers in the under $400k price point where all the competition is that all went under contract in the last 10 days. Yes, rates rose but they also fell. I had someone quoted at 3.45% with another buyer today locking in 3.625%.
In short it is both a great time to buy with amazing interest rates and a good time to sell with fair demand and low inventory. When this all passes (and it will) the demand will come roaring back without much of dip in the real estate market if any. We have not seen any price drop yet and it seems people are beginning to come out again. Remember more than anything I anticipate it being like a kinked hose… Backed up for now but will come gushing out soon (demand & prices).
If thinking of doing either please call me on my cell Monday – Saturday. Now may or may not be the times for you and we can discuss the pluses and minuses. If you have any deeper questions about real estate (or the meaning of life) please give me a call. I would love to hear how things are affecting you in your personal and professional life. I have no doubt we will come out stronger as a country, a people, and an economy. I hope you are all doing well and doing your own part to help “flatten the curve”.
Sincerely Your Realtor and Friend,