How Is COVID-19 Impacting Real Estate?
How is COVID-19 impacting the real estate market? This is the question that many anxious homeowners are asking themselves, but unfortunately there isn’t much information available...at least not yet. In this post, I seek to change that by using actual MLS data. Let me preface this by saying the available data for so recent an event is limited. We can clearly see the number of cancelled listings and the number of homes in contract, but we don’t know what will ultimately come of these. Will contracts fall through? Will cancelled listings be relisted after shelter in place is lifted? Only after a few months will we know for certain.
Findings If we compare March 24, the day shelter in place went into effect in Ohio, through April 17 over the past 5 years, there are some very interesting trends. Most notably, and not surprisingly, is an overall decrease in real estate activity. The number of new listings, new contracts, and closings is down for this period in 2020 versus 2016-2019.
But perhaps the most interesting part is buyers and sellers are reacting differently. The number of buyers in the market is best measured by the number of listings that went into contract, which is down just 13% this year compared to 2016-2019. The number of new listings on the other hand is down 22% for this same period and down a whopping 35% compared to last year! This shouldn’t be much of a surprise, as it’s easy to understand why sellers wouldn’t want their homes on the market. Having your home for sale involves strangers coming through at all hours of the day. Not to mention, when you have to leave your home for showings, there’s literally no where to go right now - nearly everything is closed. Buyers however, while cautious, don’t always have these same obstacles. In addition, mortgage rates dropped significantly in late March, creating a huge incentive for buyers to act now. But despite a slowdown in overall real estate activity, it’s still very much a seller’s market. In fact, homes that closed since shelter in place started sold for an average of 1% more money and 8 days faster when compared against the same period for the past 5 years. Right now is actually a great time to sell your home...with one caveat, which is, of course, the increased risk of exposure to COVID-19. As a side note, I’d like to point out one interesting finding that seems to contradict all basic assumptions - the number of listing cancellations. Before digging into the data, I suspected cancellations would be at an all-time high. However, there were only 227 cancelled listings between March 24 and April 17, just 5% above the 5-year average and less than the 5-year high in 2016 (240). With any unique event, there are always aftereffects. We’ll explore these next as I try to predict what the future holds for the Central Ohio real estate market.
What’s Next for Buyers? As I mentioned above, the number of buyers is down 13% compared to the past 5 years. This will almost certainly rebound as soon as the economy reopens, but the level it rebounds to will depend on how soon we go back to business. This is by no means a call to reopen the economy - I’ll leave that to the experts to figure out - but we do know the longer everything stays closed, the worse the economy will be impacted. Side note - this is based on the assumption that we reopen at the optimal time. There is evidence from the 1918 Spanish Flu epidemic that doing so prematurely will more negatively impact the economy than by reopening too late. Okay, back to real estate. If things don’t go back to “normal” anytime soon, there will likely be a large decrease in buyers for the next few quarters for 3 main reasons. Higher unemployment means less people are qualified to purchase homes. Decrease in stock market value impacts purchasing power, so the buyers who are qualified have less money to spend. Less business activity means less jobs moving to Central Ohio. If this happens, we will truly have a buyer’s market for the first time since the 2008 recession. On the other hand, if things go back to normal quickly, we may avoid such severe consequences. I anticipate a small surge in buyer activity for a short period of time once things level out. The buyer surge will likely precede a similar seller surge by 1-2 weeks as there is less preparation involved on the buyer-side. This will inevitably lead to a small spike in home prices followed by a levelling out or slight dip. Needless to say, the next couple of months likely won’t be a great time to buy a home. Homes are selling quickly and for more money right now, a trend that will continue through the end of the quarter. With that said, there is a glimmer of hope. As mentioned before, stock market values and unemployment have taken a hit, and short of a quick rebound, this will almost certainly cause home prices to drop. Perhaps not by much, but I wouldn’t be surprised if we’re back at 2017 levels by the end of the year.
What’s Next for Sellers? The good news for sellers is now is a great time to sell your home. Now and perhaps for the next few weeks will likely be the peak for the foreseeable future. Inventory has already been low for the past few months, a problem made worse by the onset of COVID-19. The number of new listings over the past 4 weeks is down 35% versus last year, but this trend can’t last forever. Much of this decrease is due to sellers temporarily and voluntarily sidelining themselves and not wanting their homes on the market. But as soon as things turn around, all of these people will hit the market simultaneously leading to a massive surge in new listings. A number I often look at is the seller to buyer ratio. This is the number of new listings compared to the number of listings going into contract. Right now, we’re at just 1.08, a 5-year low. Let’s for a moment assume things go back to normal tomorrow. If that happens, we should suspect the next month to look very similar to the past 4 years, plus an increase in the number of buyers and sellers equal to the number of those who have been sidelined for the past month. If and when this happens, the seller to buyer ratio will spike to a 5-year high (and perhaps a 10-year high, though I didn’t research far enough back to verify).
While this doesn’t qualify as a housing recession by any means, it does put us in buyer’s market territory, somewhere we haven’t been in nearly a decade. As with any market, things will eventually rebound, but homeowners should be prepared for decreasing home values for the foreseeable future. In addition, one unfortunate byproduct of this pandemic is the hit to the economy. I mentioned above the impact this will have on buyers’ purchasing power, but a bad economy also impacts sellers. Layoffs combined with decreased stock market values will unfortunately force many Central Ohioans to sell their homes, pushing the seller to buyer ratio even higher.
Conclusion In spite of everything going on, right now is actually a pretty good time to sell your home. However, there are obvious health risks involved with allowing buyers and agents to walk through your house. Because of this, I can’t recommend to anyone that now is the right time to sell. This is a decision that each person will need to make for themselves. Even though I do suspect home values to take a hit in the coming months (good news for prospective buyers), we must prioritize our greatest asset, which is the health and well-being of our families and each other. I therefore urge you to do what's best for you and yours, and understand that whatever market awaits us will one day pass.