Like all industries, real estate has not been immune to the effects of COVID-19. The pandemic has brought on major shifts in the way business has been done with far-reaching effects on the U.S. housing market and economy.
“We’re facing unusual and challenging times,” says Jim Talbot, KW Director of Research,. “The scope of impact has been different depending on where you are in the United States. Some markets were hit by COVID early, while others haven’t seen as much of an impact yet.”
To help make sense of the market and amplify your housing market acumen, we’ve distilled Talbot’s 45-minute address into the most important (and actionable) metrics below. For the most accurate picture, review your local MLS as “it could be drastically different than what is happening at a national level,” says Talbot. “My goal is to help you make sense of what’s happening.”
Related Resource: Client Communication Kit- Real Estate Rebounds
Shifts Aren’t Made Equally
At first glance, today’s shift can feel a lot like the Great Recession of 2008, but compared side by side, they are drastically different. The differences are positive, Talbot reminds:
- Real estate is in a much better position now. In 2008, real estate problems in the housing and credit market were contributors to the shift. That’s not the case this time. The housing industry was performing very well before COVID-19 and credit markets were in great shape.
- Construction and new home sales were strong going into the shift. Both had record-setting months in January and February. In fact, single family homes crested back to their historic levels for the first time since the recession of 2008.
- U.S. housing stock is underbuilt, not overbuilt, which will shore up prices. Low inventory offers a degree of protection against falling prices.
- The government learned key lessons from the Great Recession. The quick action taken by the Federal Reserve to preserve capital markets has been applaudable. Also, the quick, bipartisan action to deploy stimulus packages has been a commendable difference from 2008 to now.
U.S. Housing Industry
Where are we at? Where are we going? Several factors come together to offer a holistic look at the U.S. housing industry. Review the most important indicators:
- Existing Home Sales (March 2020): 5.27M, -8.5% Last Month, +1.2% Last Year- Source: National Association of Realtors
Don’t feel comfortable with the 1.2% year-over-year increase as a significant portion of March was still high and there were a lot of carryover sales. We will expect to see this number go down, but we’ll get through it. Some sales that aren’t happening may simply be pushed further into the year. Many observers expect to see a rush of business to come in the third and fourth quarters.
The Good: Credit markets are still very functional. Lending is happening and mortgages are being issued. We saw a slight uptick in purchased loan originations last week, which may mean more buyers are coming into the market in May. It shows that business is still getting done under these conditions thanks to your ingenuity!
- New Home Sales (March 2020): 627,000, -15.4% Last Month, -9.5% Last Year – Source: U.S. Census Bureau
We are not overly concerned about the 15.4% month-over-month drop. In January and February new home sales skyrocketed so it’s not a shock to see them retreat. The year-over-year number is something we’ll be keeping a close eye on. The decrease in new home sales alleviates the pressure on prices and may allow first time homebuyers back into the market. Especially as they’re purchasers of new home construction.
- Median Existing Home Price (March 2020): $280,600, +3.7% Last Month, +8.0% Last Year – Source: National Association of Realtors
Avoid the temptation to celebrate an 8% year-over-year increase in median existing home price. It’s unsustainable. If we continue this increase for too long there will eventually be a painful correction. We’d prefer to see this number at 4% to give consumers the opportunity for equity while staying closer to the rate of wage growth so buyer’s aren’t priced out of the market.
- Median New Home Price (March 2020): $321,400, -2.6% Last Month, +3.5% Last Year – Source: U.S. Census Bureau
These numbers highlight how strong the market was even with a drop in sales.
- Existing Home Inventory (March 2020): 3.4 Months, +13.3% Last Month, -12.8% Last Year- Source: National Association of Realtors
Existing home inventory jumped from 3.1 months in February to 3.4 months in March. While there was a slight increase, the number is still extremely low, telling us that there are still not enough homes out there. Also, low inventory acts as a moderator on any price decreases. Even if price appreciation slows, the lack of inventory may keep prices from falling as they did during the Great Recession.
- Pace of Sales (March 2020): 29 Days, 36 Days Last Month, 36 Days Last Year – Source: National Association of Realtors
Transactions moved at an incredible pace during the month of March. I believe this is an indicator of how proactive real estate agents were to react and adapt at the start of the pandemic to get deals done for their clients.
- Single-Family Housing Starts (March 2020): 856,000, -17.5% Last Month, +2.8% Last Year – Source U.S. Census Bureau
In March we were at 856,000 new home starts, among the best months in 10 years since the Great Recession. Depending on how you calculate it, 2.5 – 3 million homes are missing from the market because of the Great Recession so this number is good for the housing market.
- Mortgage Rates (March 2020): 3.31%, 3.47% Last Month, 4.27% Last Year – Source: Freddie Mac
Mortgage rates are historically low and will stay this way for a while. If you have buyers who would like to wait for lower rates, encourage them to shift their thinking and take advantage of the rates at hand. If mortgage rates come down any lower, it will be for reasons we do not want.
- Distressed Sales (March 2020): 3.0%, 2.0% Last Month, No Change from Last Year – Source National Association of Realtors
Don’t read too much into this increase from last month. It’s far too soon for COVID-19 to have had an effect on distressed sales, and 3.0% is still well below the long-term norm of 6.0% so that fluctuation isn’t noteworthy. We don’t expect to see distressed sales come roaring back to the levels of the Great Recession. Quick government action to provide mortgage relief may allow far more people to stay in their homes this time. Also, far fewer homes are underwater today than during the last recession. That means even if people are forced to sell, they can do so with a traditional sale and possibly walk away with equity and purchase another home.
- First Time Homebuyers (March 2020): 34%, 32% Last Month, 33% Last Year – Source: National Association of Realtors
The increase cannot be attributed to COVID. We believe it’s entirely because of low interest rates. We also don’t anticipate this number to go up a lot in the short term as downturns are disproportionately hard on millennials.
The U.S. Labor Market
There’s a strong relationship between the U.S. labor market and the U.S. housing market. When people have steady, good-paying jobs they’re more likely to become a homeowner or move up to a larger home. When people are facing unemployment or economic uncertainty, such goals are harder to achieve.
- Gross Domestic Product (Q1 2020): -4.8%, 2.1% Last Quarter, 3.1% Last Year – Source: Bureau of Economic Analysis
The GDP is the monetary value of all finished goods and services produced by a country made during a certain period. The fact that the GDP contracted by 4.8% in Q1 — after a strong January and February — demonstrates the massive impact of Covid-19 which really didn’t hit until the latter half of March. As such, forecasts for Q2 — which will feel the impact of the pandemic for the entire quarter — are bleak. Goldman Sachs, for example, is forecasting a rate of -35% and JP Morgan sees growth contracting by -40%. However, both groups see double-digit growth in the third and fourth quarters as states open back up.
Consumer spending, which is the largest portion of GDP calculations, fell 17% in April according to University of Michigan’s index. At 71.8, it is well below the long-term average of 86.9. This tells us that consumers are reigning in their spending. Our economy will see a boost when they begin spending again.
- Unemployment (March 2020): 4.4%, 3.5% Last Month, 3.8% Last Year – Source: Bureau of Labor Statistics
The unemployment rate for April, the first full month to feel the impact of the COVID-19 pandemic, was a staggering 14.7%. Remember, this comes only months after the country was seeing near-record lows in unemployment. We expect this crisis to continue to grow as the April number reflects data gathered three weeks ago. For a more accurate understanding, we must look at the latest numbers. In just this past week, 3.17 million people filed for unemployment, and in the past seven weeks, over 33 million people have filed for unemployment. That’s more than 2008 and 2009 combined and doesn’t account for the people who are unemployed but haven’t yet filed for benefits. Just two months ago we were at a historical low of 200,000. The more people who are out of work, the more economic uncertainty our industry will experience.
- Job Creation (March 2020): -701,000, 275,000 Last Month, 147,000 Last Year – Source: Bureau of Labor Statistics
The month of March was the first monthly drop in job creation since 2010.
- Inflation (March 2020): 1.5%, 2.3% Last Month, 1.9% Last Year – Source: Bureau of Labor Statistics
It’s easy to look at the low inflation numbers as a positive point, but inflation is a sign of a humming, productive economy. Over the past few years, we’ve seen inflation at rates lower than the Fed would like and reflected in our sluggish GDP growth. We would like to see inflation at 2% and don’t feel comfortable with this number.
The Time for Action
Equipped with this knowledge, it’s time for action. “Now is not the time to sit on the sidelines,” shares Gary Keller. Instead, move ahead with confidence and deliver detailed advice to help your clients navigate the new normal!
Start by downloading our new client communication kit, “Real Estate Rebounds.” The kit tackles the history of the real estate industry and how it typically responds to economic downturns. Collectively, the pieces will help you create a multichannel campaign and speak to your sphere and share your expertise.Access the Kit