There’s a lot we don’t know about the COVID-19, but we do know this — it has certainly affected the real estate industry and its future implications will continue to do so for some time. The U.S. housing market had a strong start to 2020 and it looked as if that trend would continue. Enter: COVID-19 — the global pandemic that shook countries’ economies and caused life as we knew it to come to a grinding halt.
Immediate Impacts of COVID-19 On The Real Estate Industry
Not every state in the U.S. has issued mandatory “shelter-in-place” orders, but each has stressed the importance of social distancing, limiting gatherings to 10 people or less, and avoiding the spread of germs through contact. Not surprisingly, these safety precautions have put a damper on open houses — if they’re able to be conducted at all.
For these reasons, and general uncertainty of the future, there was a 150% increase year-over-year in homes for sale being taken off the market in the last week in March 2020. Assuming stay-at-home orders could stay in place for several months, we will likely continue to see fewer homes for sale. Potential sellers won’t want any foot traffic in their living area, may be worried about getting a decent price, and not want to make any major moves during such a shaky period.
Virtual inspections and closings
Social distancing and closures of non-essential business have complicated the logistics of closing on a home. Pre-covid, home inspections were done with the homeowner present and loans were applied for in-person, as was the home closing itself.
Now, many agents, buyers, sellers, and lenders are adopting new practices that allow all of this to be done without putting themselves at risk. Loans can be applied and approved online, the home can be inspected while the homeowners are in another part of the home, and closing paperwork can be done virtually with a notary verifying identities by video call.
Uncertainty of the future
When the economy is disrupted and people’s jobs are at risk, people generally aren’t willing to make major changes to their lifestyle or financial position. Even those whose future job outlook seemed rock solid prior to the pandemic are living in new, uncertain times. Many also won’t want the added stress of selling their home and purchasing a new one, especially when the full impact of the virus on our nation’s economy, unemployment, and interest rates has yet to be seen.
In a recent study by Clever, 30% of homeowners said they had less than $1,000 in savings and 40% said they would run out of savings in less than a month. Furloughs, layoffs, and decreases in hours are projected to continue for several months as businesses are forced to stay closed. Eventually, borrowers will burn through their savings and default of their mortgages resulting in an increase of foreclosures.
Fewer home buyers
Despite the Federal Reserve cutting interest rates twice to historic lows in order to spur home purchases, pre-pandemic homebuyers may still hold off on buying a home. In uncertain times and with high levels of unemployment risking current investments, lenders tighten requirements for future borrowers. Plus, borrowers may not be able to afford a down payment after dipping into savings to pay bills during the pandemic. Consumers may also be leery of making large purchases — like a home, for instance — especially early on in the post-COVID era. Less buyers could mean the housing market will cool.
While many remember the housing market crash of 2008, the difference between then and now was that the 2008 crash was caused by bad lending practices within the housing industry, not by the dip in the economy as a whole.
Lending practices are largely still risk-averse, although there has been a 63% increase in subprime lending since 2010, Americans are $14 trillion in debt, and non-mortgage debt is $1.55 trillion more today than it was in 2008. In other words, while lenders aren’t lending to as many subprime candidates as they were during the 2000s, many Americans are still financially unable to cope with the economic impact of COVID-19.
On the plus side, fewer applicants are approved and loan default risk has dropped from 16% in 2006 to just 2.3% currently.
There will likely be a spike in inventory once shelter-in-place mandates are lifted. Those who pulled their listings when the pandemic first began and those who held off on listing will all put their homes on the market. Some homeowners may also be looking to downsize as a result of a job change or dip in savings.
As homeowners may not get as much for their home in the new buyer’s market, they may look for discount real estate agents in order to keep more of the profit from the sale. Typically, real estate commissions can cost a seller around 6% of the selling price, which is a substantial cost for home sellers with minimal savings.
Undoubtedly, the post-COVID era will bring about some changes in the real estate industry. But, professionals have already found ways to innovate in order to continue to buy and sell homes. By understanding the factors laid out above, you can better prepare for the future of real estate.