The Effects of COVID-19 on Housing

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The Effects of COVID-19 on Housing

Realtor's Open House Sign

As the Coronavirus pandemic continues to affect how the world lives and works, the impact on the real estate market has been understandably significant. Although the industry has undergone an irrevocable change, the news isn’t all bad. We examine both the positive and negative effects of COVID on the housing market thus far.

The Economic Importance of Housing

Unlike other financial products, housing represents a much different kind of asset. The majority of households own their homes, making them the main asset. As well, real estate owns a significant portion where it comes to economic activity. Because housing market trends have such a direct impact on the general economy, any significant shifts in demand are closely watched.

The Market Effects of COVID on Housing Affordability

Because so many jobs were lost in March due to the pandemic, both median income and housing affordability experienced declines in Q1. However, of the homes that were sold between January and March, well over half were considered to be affordable for families whose adjusted median income was $72, 900.1

Bottlenecks in every supply chain due to the pandemic, including construction, also had a significantly negative impact on housing affordability, as this caused a slowdown in home-building. Add to that the fact the country was already in a period of under-building, and the resulting effects on affordability become clear.

The good news is, despite widespread job loss and the resulting decline in the median income of U.S. families, two positives have emerged. Thanks to strong housing demand at the start of 2020, experts expect low-interest rates to remain.

As well, the stability of home prices in the past four quarters has continued. This means, as efforts to mitigate the spread of COVID-19 continue to be successful, businesses will reopen, employees will return, and buying homes will once again become the norm, which will help to buoy the economy.

How COVID Has Impacted Housing Supply

Unfortunately, housing for sale in the United States has been dramatically low for the last ten years, thanks partly to the lower number of new homes being constructed and the continued lag of the supply of existing homes when compared with historical averages.

The pandemic has seen a drop in the construction of multifamily apartment and condo homes due to the following factors:

  • Construction firms are wary of making commitments to large-scale housing projects due to the virus and the resulting economic instability.
  • Reduced funding by state and local governments for projects, including affordable housing, due to declines in tax revenue.
  • The stoppage and delay in construction due to mayoral and state orders.

However, prefabricated homes may offer a solution to less available housing. The tiny home movement is alive and well; these small and affordable units require a fraction of the building materials that traditional homes do, and they are highly mobile.

Apartment buildings may be more affordably constructed at a higher rate when modular housing units are used. Finally, the fact that the amenities and designs offered in traditional-built homes are now increasingly being offered in manufactured homes may also improve housing supply.

Mortgage Rates Continue to Hit New Record Lows

Since the onset of the pandemic, concerns about economic recovery caused mortgage rates to drop. By June 18th, a new low of 3.13% was reached when 30-year fixed rates saw a decrease of eight basis points.2 Unfortunately, widespread job loss has rendered even the lowest mortgage rates unaffordable for many Americans.

To compound the problem, the suspension of mortgage payments for the purposes of providing relief to homeowners may create its own backlash for lenders, who could run out of capital for lending to those who want to buy.

COVID’s Impact on Commercial Markets

empty conference room or office space with table and chairs

While the 2020 housing market is showing strong signs of the ability to bounce back, the commercial property market seems to be adrift in a sea of uncertainty. Despite the fact that the pandemic has rendered many commercial tenants unable to pay, landlords have continued their payment demands.

As a result, businesses have been trying to reduce their overhead by attempting to renegotiate retail and office leases just to survive. Ultimately, the owners of commercial buildings, who aren’t keen to lower rents out of fear of losing their own businesses, have been involved in fierce negotiations with tenants. In other instances, well-known retail brand names are being sued by property management companies for non-payment of rent.

Among the discord, confusion reigns in commercial markets. As the COVID crisis continues to evolve, it’s difficult to say whether the majority of businesses will go online, which would greatly reduce the need for office space, or if they will start looking for larger offices in order to meet social distancing requirements.

However, the rate at which new commercial buildings are being constructed has only slightly decreased, due to the fact that many services that can only be given in person remain in demand.

When and How Will the Market Recover and What Does Recovery Look Like?

Because of the abundance of self-isolation orders that are still in place, the recovery of the housing market will depend on when these orders are lifted. As well, until the virus is under enough control that the supply chain can recover and the worry about infection once again brings buyers and sellers out of the woodwork, the market will be unable to function as it normally would.

The housing market is already recovering in some states; it’s been discovered that although home listings tend to drop a week after stay-at-home orders are implemented, they rise gradually in the one to two months that follow. In some cities, it’s been reported that the amount of online views of new home listings has not only returned to normal but has surpassed last year’s levels.

Because of the wide variation in infection rates, stay-at-home orders, and business re-openings across the country, in addition to interrupted construction supply, the overall recovery of the housing market will likely be patchy and occur slowly.

What to Expect in the Months Ahead

Close-up of man with binoculars

Once the threat of the virus has decreased in the U.S., the house market in 2020 as a whole will experience a rebound and, quite possibly, a boom. Until that happens, would-be home buyers will be competing with one another for fewer available homes. Incredibly low mortgage rates will offer homebuyers lower monthly payments, with more money able to be directed to the loan principal instead of the interest.

The higher number of buyers than sellers means that sellers will have less competition. They’ll also be able to offer better home prices and have the luxury of time where it comes to locating the perfect buyer for their property.

For commercial real estate, the fact more employees than ever are working from home could greatly lessen the need for these properties. However, as e-commerce continues to increase in popularity as a way to buy and sell goods, and this is expected to continue beyond the pandemic, the bulk of commercial property purchases may likely be in warehouse space.

Helping Property Owners to Weather the Storm

There’s no telling what the future will bring for home and commercial property buyers and sellers.

Knowing the true net worth of your property puts you in the driver’s seat for improving your bottom line, negotiating sound deals, and turning every liability into an asset. When you need crucial information and insight to plot your course, TB-RE’s Dollarization tool delivers.

Whether you’re looking to buy, sell, or lease your property, or you require office space management, the expert team at TB-RE puts our years of experience with national and Chicago housing market trends to work for you. We advise and represent all landlords, sellers, and buyers. For more information about the full-service commercial real estate solutions we offer, call (312) 473-1764.