The real estate industry has been rocked by the COVID-19 pandemic. Almost overnight, open houses were banned, listings were pulled, and buyers disappeared.
But as the lockdown enters its third month, we’re starting to get a clearer picture of the state of the industry, and its long term outlook. A new study from Clever Real Estate surveyed prospective buyers and sellers, and uncovered some trends that have interesting ramifications for the market in general.
Buyers and Sellers Are Spooked
When the pandemic lockdown started in March, buyers and sellers backed slowly away from the market. A month later, they’re in full retreat.
In March, only 3% of homeowners said they’d indefinitely paused their plans to sell their home because of the pandemic; just a month later, that percentage had rocketed up to 27%. That’s a 9X increase, suggesting that sellers’ confidence in the market fell off a cliff sometime between March and April.
The same trend applied to sellers who’d already listed their homes. In March, 13% of sellers had pulled their listings off the market because of the pandemic; thirty days later, nearly a quarter of sellers (23%) had withdrawn their listings. Why? Well, a dire shortage of buyers is one reason. But there are psychological factors at play, too. 52% of homeowners surveyed said they were concerned about the value of their home as a result of the pandemic. This implies that, even if there’s a full reopen, sellers might be hesitant to list their homes, if they don’t think they’ll have a shot at getting a fair price. That could translate to a long-term malaise.
Other data is more ambiguous. In March, 27% of sellers dropped the price of their listing, hoping to quickly attract a buyer. By April, only 11% had cut their price. Does this mean that sellers are giving up hope, or that they’re standing pat in anticipation of a strong rebound in the near term?
Things are equally discouraging on the buyer side. Early on in the pandemic, buyer demand was essentially unchanged; in March, 93% of prospective buyers said they were going ahead with their plans to buy, regardless of what was happening with COVID-19. Just a month later, 40% of buyers had given up on buying for “the foreseeable future.” That’s a huge 5.5x month-to-month increase, though as with the seller data, it can be hard to interpret. If these buyers are retreating from the market simply because open houses have been cancelled and the number of listings has nosedived, then they’ll likely return en masse when the economy reopens. But if they’re sitting things out because they believe the pandemic has either revealed or caused a major problem in the market, it could be a while before they resume their home search.
Of course, the market isn’t suffering only because of psychology. Americans are in real financial pain; among homeowners surveyed, 56% said they were worried that they were going to exhaust their savings before the end of the pandemic, 51% said they were worried about being able to pay everyday bills, and 33% were worried they wouldn’t even be able to make their mortgage payments. Financially stressed homeowners who feel that the market might be undervaluing their homes doesn’t bode well for the immediate return of a normal market, and scared sellers could use some unconventional— and perhaps inadvisable— methods to save money when they do sell.
One Market, or Many?
But what’s a normal market? A return to normalcy will mean radically different things in different areas of the country, since some markets have declined more than others.
According to a recent study by the Brookings Institute, which looked at the impact of the pandemic on the hot Washington D.C. market and the surrounding area, found that sales volume plummeted across the entire region. But while the District’s urban core saw sales decline by about 30%, some outlying suburban areas saw decreases of double that.
This is counter to some recent reports that urban homeowners are fleeing cities en masse, and settling in the suburbs— though D.C.’s pandemic peaked later than New York’s. Point being, it takes a much stronger rebound to make up a 60% decline than it does to make up a 30% decline. In an economy that’s hamstrung by wavering consumer confidence, that means some areas could be left behind.
There was one bright spot in the Brookings study, though. Although sales volume fell off a cliff in D.C., median sale prices actually went up, even in March.
The D.C. numbers correspond to national data, which saw a 41.5% drop in sales volume in the Northeast U.S., and a 38.5% decline in the West. But some experts found reason to hope for a quick rebound across the board, as the virus recedes. Home sales jumped an impressive 34% in January 2020, an eight year high for the month, driven by strong demand from Millennials, and ultra low mortgage rates. The fact that rates are only going lower, and that many of those potential Millennial homeowners will still need a home when the lockdowns lift, bodes well for the housing market.
It’ll Get Worse Before It Gets Better— But It Will Get Better
Other experts return a more mixed but ultimately more positive forecast. Zillow looked at the data, and projects only a 2-3% drop in home prices through the end of 2020 (consider that after the 2008 crash, home prices nosedived by 30%), before likely returning to normal levels sometime in 2021. If sellers take this forecast seriously, a lot of them could wait out the market for a year, severely constricting supply.
Zillow also thinks sales volume will bottom out at 60%– a stunning number, but somehow not as bad as it could be. Their analysts have also put together three different market forecasts running through the end of 2021; one is the optimistic outlook, one is the pessimistic outlook, and the third is the most likely. Looking at these curves closely shows that, while the future looks fairly positive, there’s still a lot of variance there.
Under Zillow’s optimistic assumptions, the market could experience a fast, V-shaped “snapback” similar to what happened in Hong Kong after the 2003 SARS outbreak.
The pessimistic curve lives up to its name. It sees home prices still down 2% below pre-pandemic levels at the end of 2021, with sales volume going from a bottom of 40% of pre-pandemic levels up to only 60%. This forecast assumes grievous long-term damage from the pandemic on par with a severe recession, or even a depression.
A lukewarm market could bring on a cascade of negative consequences, with the possibility of everything from a big decline in FSBO sales (which are really only viable in a booming market), to a significant number of agents exiting the industry.
When you look at the forecasts closely, it’s clear that only the optimistic one translates to a fully-recovered economy, while the most likely scenario and the worst case scenario depict realities where we’re still dealing with serious financial impacts of the pandemic two years from now. That’s a sobering thought, but it’s still early. For now, we’re all going to have to wait and see, and hope that psychological and financial contagion doesn’t end up outlasting the literal contagion that started this whole mess.