As we entered the COVID-19 pandemic, the real estate market was sizzling. Homes were being constructed and sold at robust levels. Mortgage rates had dropped to near-record lows. The housing market was tight in many major metro areas. But, of course, the coronavirus is changing everything, including the real estate and housing market.
To be sure, real estate is still being bought and sold in the country. But even the National Association of Realtors predicted about a 10% reduction in sales in 2020. We are now to the point of projecting just how COVID-19 may affect real estate and the housing market in a post-pandemic world. How will it impact demand, prices, and interest rates? How will the buying and selling process itself change and how different will the real estate industry be?
Making any predictions during change can be hazardous. Here, however, is a look at how COVID-19 may affect various aspects of real estate including housing values, the real estate industry, and the acquisition of loans.
A Note Concerning Commercial Real Estate
This article focuses on personal, residential real estate and not commercial real estate. There is much speculation on the future of commercial real estate, mainly based on the economy and whether or not remote working (working from home) will become a permanent part of how Americans get work done. Like many aspects of this article, working from home was already gaining steam before the coronavirus. It can be assumed that many companies will continue to adopt work-from-home policies, potentially negatively impacting commercial real estate.
A recent survey from the real estate website Redfin suggests that Americans are split almost 50/50 when it comes to their attitudes on whether housing prices will increase or decrease in a post-pandemic world. Interestingly enough, those with higher income levels that exceed $200,000 annually, tend to be less optimistic about housing values increasing. This less than optimistic view on housing values may be tied to the stock market, in which many wealthier Americans are invested.
The Redfin survey indicates that about 50% of people in higher income brackets believe COVID-19 will negatively impact housing values while only 40% of those in lower brackets feel similarly. It is perhaps not surprising that location had a big impact on how people viewed potential housing values. About 59% of respondents from New York City, for example, were not optimistic about future housing values. The number was similar in Las Vegas where 58.3% viewed housing values in a post-pandemic world negatively.
Housing values, however, will likely be impacted by much more than just attitudes. Many believe the extremely attractive interest rates will serve the housing market well post-COVD-19. There was little opportunity to see just how the latest rate reductions would impact housing prices when the pandemic hit. Those low rates should still be available, at least for a while, when the pandemic begins to ease.
There are also concerns about the impact social distancing may have on housing values. Will people be willing to go out and enter the homes of strangers or attend open houses as readily as before? Will agents find themselves maintaining social distancing levels from clients and will these measures discourage those from selling or buying real estate? Will pandemic fatigue create a willingness to stay in place for a while or will it inspire homeowners to take action?
Perhaps the biggest unknown is the impact the economy will ultimately have on home prices in a post-COVID-19 world. Those who have been unemployed for an extended period may have had to dip into funds intended for a down payment for routine living expenses. Credit ratings may have been damaged through the loss of work or underemployment. The millions of Americans who have been laid-off, furloughed, or simply had their employers disappear during the pandemic will more than likely have plans for homeownership delayed. Fewer buyers, of course, means lower housing prices.
The impact of unemployment can be a double-edged sword for housing prices. While it limits the pool of available potential buyers, it also may increase the number of people who may have to sell their home due to coronavirus loss of employment. Although the Federal Government has forced lenders of mortgages backed by Freddie Mac, Fannie Mae or the Federal Housing Administration (FHA) to offer forbearance or reduced payments to borrowers facing challenges, it could still add homes to the housing inventory with a limited market for those homes.
History indicates that an outbreak will at least have some negative impact on housing prices. That impact will depend on the length and severity of any associated economic recession. It will also be largely influenced by geography. It would not be surprising to see a cooling effect on previously red hot housing prices.
Impacts on the Real Estate Industry
It should be clear that even pre-pandemic, the real estate industry was experiencing significant changes in how property was being bought and sold. New technology was changing how homes were being financed and how closings were taking place. Rather than changing how the real estate industry is conducting business, COVID-19 is offering more validity to the changes previously made and solidifying their long-term place as a part of how real estate sales and purchases are conducted.
The use of technology itself, however, will not prevent a dip in the market. As an example, most major real estate related websites have reported drops in traffic from 30-50% during the early days of the pandemic. These reductions would likely similarly be felt in brick-and-mortar real estate companies as well.
So, what can we expect in the post-pandemic real estate industry?
- Continued growth of online listings. The past decade has seen an explosion in online real estate listing sites, services, and FSBO websites. Consumers have found many of these sites informative, effective, and economically viable and valuable. Even should they pursue the assistance of a real estate professional, many would have already conducted a great deal of due diligence and self-screening of homes. Online real estate related sites are destined to continue to play a vital role in the marketplace, perhaps even extending their reach.
- The changing role of agents. The movement to digital self-service and semi-self service real estate websites will result in a changing role for real estate agents. Agents will find themselves performing fewer tour guide services and more concierge-style professional services. Some real estate agents may find themselves specializing in specific types of real estate or in assisting particular types of buyers or sellers. Real estate agents may find it lucrative working through online services in providing limited professional services to more clients. Of course, there will always be a place for full-service real estate professionals, especially where unusual or exceptional properties are involved.
- Greater use of virtual technology. Once reserved for high-end properties, virtual technology and tours are and will continue to be more commonplace for average homes. Extensive virtual tours are designed to show off the best features of a home and will even allow users to “walk around” a home’s property. Drone footage can demonstrate the full impact of a property’s footprint and landscaping. Technology has made virtual tours more immersive than ever and could potentially eliminate the need for open houses and limit personal tours to those who have already screened themselves by experiencing the home virtually.
- An increase in digital closings. Although every participant in a closing may have something to learn from the process, few would suggest they “enjoy” it. Previously, closing on a home in person could be tedious and time-consuming. Today, it is becoming unnecessary. Technically, there will still need to be a closing date and time; however, it is increasingly done completely online. Instead of signing mounds of paperwork, forms can be signed-off on digitally and funds transferred securely.
The combination of convenience, security, and the desire for social distancing will continue to push the digital aspects of buying and selling real estate in a post-pandemic world. What was already taking place will be solidified and more readily accepted.
Impacts on Loan Acquisitions
Before the coronavirus outbreak, consumers were already embracing the digital loan process in record numbers. Applying for real estate loans online has become more secure, convenient, and quicker than traditional mortgage acquisition processes. Now, the social distancing aspects of applying for a real estate loan online makes the process even more attractive.
Applicants can find current rates and use online loan calculators to determine how much home they may be able to afford and what monthly payments are likely to be. Getting pre-approved for a mortgage loan online is a valuable negotiating tool when looking to purchase a property. It provides more security for a seller that you will be able to acquire the loan for their property. In some cases, this is more important than a higher offer.
Online loans make it possible for consumers with less than perfect credit to qualify for mortgages and to obtain mortgages with less demanding down payment requirements. It also allows consumers an easier way to compare the impact a loan rate will have on their monthly payments.
A More Complete Digital Process
Among all of the individual impacts COVID-19 will have on the real estate and housing market, its overall biggest effect will be on solidifying the digital aspects of the industry. Now a seller can completely list their home for sale online, uploading detailed descriptions and images and even scheduling virtual tour filming. Sellers can choose expertise where they need it and opt to do-it-themselves where they are comfortable. Sellers have more of an impact on how much equity they maintain in their property. They can control who and how many strangers need to enter their home. They can accept and reject offers online and even complete the closing process digitally.
Today’s buyers can perform extensive property searches online before contacting an agent. They can get pre-qualified for loans and have confidence in their offers. They can secure their mortgage online and complete the closing process without physical mounds of paper in front of them.
The roles of real estate agents may change, but their importance may not. Buyers and sellers will still require at least some guidance in the process. While fully-commissioned, full-service, one-on-one real estate transactions may become less frequent, the services of a professional agent will always have value.
The housing market will likely see a flattening out following the COVID-19 crisis, and could potentially see a decline. This decline will depend greatly on the length and severity of any recession or economic downturn.
It will, however, secure technology’s role in the industry, generally for the mutual benefit of everyone involved. It may be challenging to find the positives of an event like coronavirus, but creating and solidifying some positive changes in how we conduct business, including real estate could be one.