How COVID-19 is Affecting the Real Estate Market
The real estate market has been substantially impacted by COVID-19, causing home prices to skyrocket due to low mortgage rates. Understanding how this could affect you is vital if you want to protect your financial future.
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couple on couch in new home purchased during covid-19 pandemic

How COVID-19 is Affecting the Real Estate Market

The emergence of COVID-19 may primarily have been a health emergency, but the financial crisis that followed in its wake was larger and more sudden than almost anything that’s happened before, affecting the real estate market immensely.

Between the millions of overnight job losses and the severe business impacts of social distancing, lockdown, and other restrictions, the economic picture was as bleak as it was frightening.

Yet amid all this, the U.S. housing market entered into an unexpected boom, with residential prices rising rapidly. Figures from CoreLogic suggest the total equity held by U.S. homeowners rose by 16.2% over the 2020 year, amounting to around $1.5 trillion extra real estate wealth overall.

What’s more, by most measures the volume of home sales was at the highest since 2006, on the cusp of the financial crisis and real estate crash that caused the last recession of 2008-2009.

While this strong housing market activity may be good news for homeowners who’ve seen the value of their homes soar, the picture is less attractive for younger renters who’ll find it yet more difficult to take the first step into home ownership.

But why is the housing market so apparently healthy and confident, when the rest of the economy is in such turmoil and plagued by uncertainty?


High Demand and Low Supply Leads to Price Rises 

It’s a basic law of the housing market that when more buyers are chasing fewer houses, the prices will rise as wealthier buyers out-compete their rivals. According to one market tracker, average prices for single-family homes rose by 11.2% over the course of Covid-hit 2020, one of the largest rises in recent history.

Compare this to the last recession of 2008-2009, where average house prices plunged by around a third, and it’s clear that something very different is in play. 


Attractive Mortgage Rates 

There are two main reasons for this unusual real estate market behavior in the middle of a deep economic downturn. First, government action to support the economy has kept mortgage rates at a historic low, tempting many buyers to take advantage of the inexpensive finance deals available. This is particularly true of homeowners looking to move to a new property, as their current ownership gives them a cushion against the rising market.

The attractiveness of the current low mortgage rates shouldn’t be underestimated. Consider a $350,000 house bought with a 30-year mortgage and a down payment of 20%. At a typical pre-pandemic rate of 3.73%, the average monthly repayments would have been $1,589, totaling $572,040 over the term of the mortgage.

At today’s typical rate of 2.67%, the same home would cost $1,427 a month and $513,720 overall. The savings of $162 a month and $58,320 in total make a genuinely tempting prospect for those in a position to buy.

The buying incentive is even stronger when you consider that mortgage rates were as high as 5% in 2009, in the aftermath of the last recession, and there’s no reason to expect that today’s exceptionally low rates will continue indefinitely.


Low Housing Supply 

A second reason for the boom is that the housing supply was already under strain before the pandemic hit, with too few homes being built to keep up with demand. This squeeze on supply was made even worse under Covid, with many people reluctant to list their homes while the pandemic progressed. Not only do people feel wary of making major life changes during a time of such uncertainty, but social distancing and a raw fear of infection meant that traditional selling methods such as open viewings were off the table for many.

According to the National Association of Realtors (NAR), the number of active listed properties fell from 1,390,000 in December 2019 to just 1,070,000 in December 2020. This twelve-month inventory drop of 23% is a figure unseen in the 21st Century, the 2008 financial crisis notwithstanding.

What’s more, the pace of sales was hotting up in line with the reduced inventory. Again according to the NAR, there was around 3 months’ supply of homes on the market in December 2019, based on average selling times and volumes. Over the following 12 months, the supply fell to just 1.9 months, another record in recent history.

An even clearer photo of this, a mammoth 72% of homes that sold in October 2020 had been on the market for less than a month, a clear reflection of the high level of demand.

With a large proportion of the selling market effectively on pause, but with relatively little slowdown in buying, the combination of low supply and high demand inevitably led to a surge in prices. It’s a trend that shows no sign of changing track for the moment.


Commercial Real Estate 

The apparently rosy picture has a very different hue when it comes to commercial real estate. As the economy plunged, businesses across the country pulled their shutters down as restrictions and lockdown took hold.

Large numbers of businesses failed almost immediately, while many others went into a kind of hibernation while the pandemic’s course unrolled. Government assistance and lender forbearance meant that a full commercial real estate collapse was avoided. But as these measures are phased out it’s likely that many more businesses will go to the wall, leaving increasing swathes of commercial premises empty.

The end of the pandemic should see an upturn, but it’s unlikely there’ll be an immediate surge large enough to replace these businesses and take over their real estate. Add to this the expected rise in long-term home working and the resulting drop in office space demand, and the future for commercial real estate looks a lot bleaker than for the residential sector.


What Happens Next for Housing? 

Although the days of rampant Covid 19 spread seem to be nearing their end, there’s still no clear sign of how the housing market will react to whatever settles in as the new normal. However, it’s likely that several long-term trends will continue to play out.

  • People will still want to buy homes, and unless something changes to rebalance supply and demand, prices will continue to rise over the medium-to-long term.
  • Mortgage rates are likely to stay on the low side until the economic fallout of the pandemic is fully measured and priced in, keeping demand inflated.
  • If home working continues at high levels, with the resulting drop in commuting, there could be a widespread move into more rural areas for wealthier buyers keen to enjoy a larger home in more attractive surroundings. This will tend to open up housing supply in urban and suburban areas, particularly at the lower end of the market.


All three of these factors mean there’s little prospect of a major downward price correction, and so delaying buying may not make things any easier on your budget. On the other hand, if you’re thinking of selling, there’s little immediate reason to rush. There seems little to no chance of the dramatic price falls of a decade ago repeating themselves, and pushing you into negative equity as a result.


To counteract the lively real estate market, there are a few factors which will act to dampen prices, and it’s not yet clear how extensive the impact will be.

  1. Real estate agents and the wider buying market have begun to adapt to the new situation. Digital viewings are now easier, more realistic, and more accepted by buyers, helping to ease more homes onto the market. Indeed, around two-thirds of 2020’s home offers were made without a physical viewing, showing a clear direction of travel. 
  2. As people adjust to the new normal, risks become more easily measured, and people start to return to older behaviors. This means there’s less fear of opening homes to viewings, for example, reducing the reluctance to list.
  3. However, as government business assistance is rolled back, the full effects of the pandemic will ripple through the economy. Higher unemployment will lead to more foreclosures, while a poor economic outlook means more people will downsize to lower-cost locations or switch to the rental market.
  4. There’s speculation that some property developers may convert vacated commercial real estate into residential property, boosting the available supply.


All four of these factors mean there’s likely to be an increase in the available housing inventory, helping to stop prices running out of control.

As these two pressures balance out, the likelihood is that the post COVID-19 housing market will continue on its recent pre-pandemic path of rising prices, relatively low interest rates, and a healthy amount of sales activity. If you’ve been looking to buy, and you’re confident your financial situation is relatively secure into the future, the coronavirus might no longer be a reason to delay.

But the picture isn’t getting any more attractive for renters keen to switch to ownership. The low mortgage rates currently on offer won’t likely be available without a hefty down payment, and saving the kind of cash necessary will become even harder as rising house prices inevitably feed through into higher rents.

That said, no one can predict the exact shape that the COVID19 recovery will take, nor when it will gain full momentum, or what the final effect will be on the housing market. Although spring 2021 has revealed strong hints of light at the end of the tunnel, the situation could change with new virus variants or new surges in infections. 

As always, consider any home buying decisions carefully, keeping up to date on how the market is changing, and seek advice from a professional on any aspects you’re unsure about. 


Keeping Up with Your Debt Can Help You When it Comes to Buying a Home

If you’re in the market for buying a home, especially your first home, now is a great time to assess the other debt you might be carrying. Consider refinancing your student loans if you carry any, potentially scoring a lower rate and better terms. If you have credit card debt, a personal loan for consolidating it at a lower rate may also save you thousands of dollars in interest.

Be smart about how you spend your money, but also about how you manage your financial health as a whole.