A common question we have been getting asked lately is, “How will COVID-19 affect home values?”.
With so many market disruptions as a result of COVID-19, this is a very practical question. Since you are reading this blog post, it is probably a question you have as well. We will start with answering another question, “What drives home values up or down?”.
Home values are driven from supply and demand. Demand tends to fluctuate based on three main factors: jobs, income, and affordability. Supply is driven from people wanting or needing to sell their homes. It can also come from home builders creating new homes to sell.
Many people hear the word recession and think of 2008 when housing prices drastically went down. You may be thinking a recession means that this will happen again, but don’t forget that it is all based on supply and demand. The housing value decline from 2008’s recession was largely due to bad mortgages being made and homeowners losing their homes. Prior to the 2008 recession, there was far less regulation on the mortgage industry which allowed people to obtain a mortgage and purchase homes without proving income, assets, and many other crucial factors for proper mortgage qualification – including down payment. When the 2008 recession hit, many people lost their home(s) and this led to a huge spike in supply. Because of this large supply and lower demand, prices went down as homes were trying to be sold as fast as possible.
So, what is different this time? After 2008, there has been a large increase in government regulation on the mortgage industry and strict rules set in place for mortgage qualification. Current homeowners are well qualified and far less likely to lose their home. Also, during the 2008 recession there were a lot of new homes being built which added to the supply whereas today there is still a lack of new home construction based on historical trends.
Prior to COVID-19, many housing markets were experiencing low supply and high demand for average property prices. Basically, prices were stable and often there would be multiple buyers interested in a property. This was driven by a strong job market with good incomes, and low mortgage rates which helped with monthly affordability.
Now that we understand some history, let us look at how changes from COVID-19 may affect home values. Current and future demand will be a very important factor in keeping home values stable, so here are some things to watch and think about.
Mortgage Interest Rates
With mortgage interest rates at historical lows, affordability for home buyers is still strong. Keep an eye on interest rates because if they start to increase this may cause less demand.
Jobs and Employment
As we write this blog, the United States unemployment rate is very high and unemployment pay is also higher due to COVID-19. Jobs and income are a very important factor for housing demand. If jobs continue to suffer and incomes do not return to normal, it will negatively affect demand from home buyers. The focus here is how quickly the economy and jobs will recover.
As we stated above, foreclosures lead to higher housing supply and often lower prices, which is what happened during the 2008 recession. There is currently government legislation that appears to prevent foreclosures due to COVID-19 financial disruption for at least the next 12 months. This will really help keep the housing market stable and prevent huge real estate problems like we had during 2008. Currently, the government is doing everything they can to prevent foreclosures.
COVID-19 financial disruptions have spooked some areas of the mortgage markets and a lot of mortgage products are seeing more strict qualifying guidelines. It is getting slightly more difficult to qualify for a mortgage with newly added savings requirements and higher credit score requirements in some instances. This means there may be less demand as a small percentage of individuals wanting to purchase a home might not qualify now or their ideal mortgage product may not exist.
New Listing Nervousness
Some homeowners wanting to move or sell their home are pausing since they are concerned about strangers coming through their property during a pandemic. This will lead to slightly less housing supply / new listings, however virtual tours and other creative methods to show homes are still taking place. Deals are still being done and should only increase as more lockdowns are lifted and people get back to day to day life.
Vacation Rentals and Investors
Investors play a large roll in the housing market and are an important part of housing demand. Due to the uncertainty of rent from tenants and certain new rules protecting renters who cannot pay rent, we are seeing investors more cautious about buying real estate. Until the COVID-19 uncertainty is behind us, we expect investors to be cautious and not as active in the real estate market. A large part of this as well are vacation rentals and people who have purchased homes for Airbnb income. Some investors in vacation rentals may fall into financial trouble and need to sell their properties which will lead to increased supply.
Luxury Homes and High-End Real Estate
Average homes and home prices tend to have steady demand, but luxury homes and high-end real estate are heavily dependent on the economy and business environment. We are starting to see many high-end homes become more affordable with price decreases and less demand.
With central banks and governments keeping interest rates low, and foreclosures not being an issue for the foreseeable future, we expect home values to remain relatively stable. In addition to this, we expect the job market to start improving which helps with demand. Governments around the world are also providing a lot of stimulus money and appear to have entered a “whatever it takes” mindset which also helps keep housing prices stable or increasing. Currently, there still appears to be low housing supply and steady demand.
Looking into the future, housing prices should stay stable if mortgage interest rates remain low, and the recovery from COVID-19 continues to improve. If, however, the issues from COIVD-19 continue and the United States falls into a prolonged economic recession, it may negatively impact housing prices.
As you move forward on your home buying or mortgage journey, we are here to help you navigate through each step of the process. Education is very important to us and we help our clients understand the real estate and financing markets so they can make informed decisions.
With over 16 years of residential mortgage experience, West Coast Mortgage Group has mastered the art of helping clients through the loan process and into successful homeownership. We are here to answer any questions you may have, and our team is here to assist you with your home purchase, mortgage refinance, and mortgage planning. Call us at any time for a free live consultation or schedule a meeting today!