What are the impacts of coronavirus (COVID-19) on the USA real estate market?

The Covid-19 coronavirus pandemic is the black swan event of our generation. As of the point of writing (Apr 29th, 2020), there are more than 3 million cases globally and 200k deaths. The United States is, unfortunately, the hardest-hit country with 1M cases and 58k deaths.

One of the evident effects of the pandemic is the economic fallout. More than 17 million people filed for unemployment benefits in the US in the 4 weeks leading up to Apr 10, 2020. In the week of March 28 alone, 6.9 million people filed for aid. The immediacy and extent of the layoffs are without precedent. For comparison, the last record for unemployment filings was in 1982 when filings rose by 695,000. This is an almost 10x of the last record.

This brings us to the question of what will the impact be on real estate in the US? The jury is still out on the longer-term impacts and we’re still in the early days of decisively knowing, but what is already evident is that in the short term, residential housing prices will likely fall as buyers get cold feet and face economic hardships.

My personal opinion is that residential properties will experience mixed impacts depending on the geographic location of the property. For some markets, I anticipate that real estate will not only recover in the medium to long term but may even experience higher investment returns than other types of assets. A key reason is that prior to the pandemic, many residential markets already had tight inventory and high buyer demand. Now, with low mortgage rates and financial intervention from the Fed to stimulate the economy, consumer demand will likely resurface.

Impacts on who in the housing market?

Ultimately, coronavirus (COVID-19) will have different impacts for different stakeholders. In this article, we discuss and breakdown the impacts on:

1.       Homebuyers
2.       Sellers
3.       Homeowners
4.       Renters
5.       Landlords
6.       Real estate investors

Impacts for Homebuyers
Because of the pandemic, the Fed has lowered the benchmark interest rate to zero to spur business lending and economic activity. This has mostly resulted in record-low mortgage rates (note that the rates fluctuate but generally track the benchmark interest rate), resulting in a bonanza for homebuyers who can take advantage of these low mortgage rates.

On the flip side, because of the pandemic, many Americans have lost their jobs and the government has stepped in to mandate that all borrowers with government-backed mortgages are granted forbearance for up to six months, at the end of which they can get another half a year of suspended payments. The government is also putting pressure on borrowers with private loans and compelling lenders to provide for similar relief measures.

These measures have spooked mortgage servicers and caused liquidity issues since they still have to pay mortgage bondholders. Some lenders have suspended funding for government-backed loans like VA and FHA mortgages while other lenders are tightening lending criteria and pushing out a segment of borrowers who in a regular market, would have qualified for a loan. Therefore, some buyers may not be able to get a mortgage now when a few months prior, they would still have been able to.

However, for buyers who are able to obtain funding, this might be an opportunistic time to find deals and negotiate hard given the downturn and a slow market for sales. On average (after all, real estate is highly localized), prices have started to trend downwards, and continued distancing measures plus economic fears may compel prices to continue falling through Summer 2020.

Summary: Opportunistic property buyers stand to gain from lower mortgage rates. Lenders have increased lending standards so potential home buyers should check what this is.

Image by Nattanan Kanchanaprat from Pixabay

Impacts for Sellers
Because of the highly contagious nature of the coronavirus, most states have restricted real estate activity to virtual activities only, including showings. Even if in-person showings are allowed, most buyers are not comfortable viewing properties now as it increases the chance of being infected. What that means is that sales activity has dropped because most buyers will not purchase a home without doing at least one visit. This might be feasible for investment properties but likely not a home that someone intends to live in themselves.

Many sellers have therefore decided to not list their property in this market as there is a lack of demand. According to Redfin, there was a 148% increase in homes being delisted during the weekend March 29, 2020, or a total of 28,140 homes. For sellers who need to put their homes up for sale, the median asking price for newly-listed homes was $309,000 or about $21,000 lower than two weeks earlier.

In short, buyer demand has dropped because of employment uncertainties and an inability to view properties in-person. Many sellers have hence pulled their listings off the market if they are financially able to wait out the peak of the pandemic. If for personal reasons, you need to sell your property, be prepared to negotiate with buyers. And while closings are still happening, these will likely be with delays.

Summary: Sellers have to temper their expectations on pricing and time to close.

Impacts for Homeowners
The pandemic has resulted in record levels of unemployment as most states issue a stay home order and businesses shut down temporarily or permanently. For homeowners who have lost their jobs and face financial difficulties making their monthly mortgage payment, do not just stop paying your mortgage. Instead, research what options are available to you then reach out to your lenders to either discuss a forbearance agreement or longer-term repayment plan.

According to the Consumer Finance Protection Bureau, forbearance is when your mortgage servicer allows you to temporarily pay your mortgage at a lower payment amount or pause paying your mortgage. You will have to true up and pay the payment reduction or the paused payments back later. 

If you have a government-backed loan (e.g. Fannie Mae or Freddie Mac), you can seek forbearance for up to six months, at the end of which they can get another half a year of suspended payments. In addition, lenders will not report forborne payments and delinquencies to the credit bureaus, which means that borrowers who request forbearance will not see their credit scores suffer. If you have a private loan, you will have to speak to your lender to discuss your options. This tracker provides comprehensive options for private lenders.

Because the Fed has reduced interest rates to encourage economic activity, many homeowners have taken advantage of low mortgage rates to refinance their current mortgages and reduce monthly payments. Depending on their current rates and length, this will allow them to potentially save a lot of interest in the long run.

Summary: Homeowners in financial difficulty can apply for mortgage forbearance if they have a federally-backed loan. Homeowners in good financial standing can consider refinancing if their current rates are not in line with the market.

Impacts for Renters
Similarly, the economic downturn has hit renters hard and left many either furloughed or unemployed. As of writing, there isn’t a rent moratorium in the US so renters have to understand their options if they are unable to pay rent.
One immediate thing is to communicate the situation with your landlord and see if a plan can be worked out in the short-term. Please note, we do not encourage going on a rent strike, especially if
you have not communicated your challenges to your landlord.

In parallel to the conversations with your landlord, research what government assistance you may qualify for that can make up for the lost income. This includes applying for unemployment benefits especially, especially as the criteria has been expanded due to the pandemic and additional monetary relief added from the $2.2T package passed by Congress.

In some cities and states, the local government has issued an eviction moratorium, with the majority being for 90 days or more. What this means is that during this period, landlords will not be able to evict their tenants if their tenants do not pay their rent. Note that this doesn’t exclude landlords from evicting their tenants after the moratorium is over.

Summary: Landlords will not be able to evict tenants who can’t pay in some cities and states. However, we recommend renters with financial hardship to discuss individual payment plans with their landlord.

Impacts for Landlords
As some renters start to not pay rent and with an eviction moratorium in some cities/states, how should landlords prepare for this?

Firstly, landlords should try to increase its cash buffer in case of reduced rental income and fixed expenses. Alternatively, and only if there is a financial need to, landlords can apply for mortgage moratorium to suspend their mortgage payments. This might provide some relief but it is only temporary and landlords will still be liable to pay this amount in a lump sum at the end of the moratorium.

The most ideal option is to work out a mutually agreeable solution with your tenant. Also, landlords can proactively communicate with their tenants to understand which may face issues paying their rent, instead of paying till the time when rent is due.

Summary: Build up a cash buffer (if possible) for an expected increase in tenant non-payments.

Impacts for Residential Real Estate Investors
Personally, I think it is too early to predict how the pandemic will affect real estate investors plus the impacts will differ based on where in the USA. On the one hand, property prices have fallen and will likely continue to fall, which means there are good deals to be had. Also, borrowing rates are low (because the government is using low rates to prevent a large-scale recession) and therefore the cost of financing a rental investment property is also lower relatively. This is good news for investors with longer investment horizons who can wait for the economy to bounce back and enjoyed the low purchase price and locked-in mortgage rate.

On the other hand, an uncertain global economy typically sends investors towards ‘safer’ assets like real estate and the US dollar as currency. This might lead to more investment in certain types of real estate, likely in established cities like New York City with less perceived downside risk.

The calculus for real estate investors, and really for any business person in general, has also changed. The COVID-19 pandemic has halted consumer spending and led to mass layoffs of an unprecedented extent. Some renters may not pay rent for months with an eviction system that may also be severely backed up. Going forward, investors will try to avoid similar situations by either setting more stringent standards for renters or requiring a higher return for taking on this risk. Also, in the last recession, the landscape of ‘residential SFH landlord changed significantly with aggressive entrance and purchasing of foreclosures by institutional landlords. If property prices decrease precipitously like in the 2008 recession, then we might see something similar happen here.

In terms of living preferences, I anticipate some outward flight from cramped, urban cities, and towards larger residential homes that can accommodate a home office or space for working. I also expect rural towns with limited medical facilities to see a flight of residents in the medium term. Overall, tier 2 cities like Charlotte NC, Atlanta GA, Autin TX, Denver CO, and Portland OR will continue to grow in popularity and yield potential returns for investors.

Summary: Too early to predict impact but Tier 2 cities likely to see strong growth.

By Justine Chan, Founder of Live With Plum, the modern woman’s home buying guide. 

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