While we are in the middle of the novel Coronavirus pandemic, home sellers are not lowering their prices. COVID-19 is causing stock market swings and volatility that we have never seen before. However, in these uncertain times, we do see some silver lining and opportunities available for that one can benefit from.
Housing plays a significant role in our economy. This is evidenced by the percentage of the gross domestic product that it makes up. And our Federal Reserve at times will step in to buy MBS (Mortgage Backed Securities) in order to help fellow Americans, buy homes by keeping mortgage rates low so more people can fulfill their home ownership dream.
During many stock markets ups and downs, we have not seen that the housing market necessarily is directly correlated. The 2008 financial crisis was an exception that saw housing and stock market move in tandem. This is because people do not buy houses purely as an investment property. Housing fulfils some of our basic needs. And the decision to buy a house is generally driven by the fact that one may be entering a new stage of life.
For example, a newly married couple who decide to move in together and want to buy a house, or a couple who are having a kid and need more space for the new member in the family. Empty nesters who don’t want the upkeep of a large house after their kids go to college want to downgrade to a smaller house. These are some of the most common reasons people buy and sell homes. And stock market volatility does not change these circumstances for many people.
Is inventory still low?
According to 3,000 Realtors surveyed in April by the National Association of Realtors (NAR), most sellers have not discounted their homes so far to attract new buyers. Some 74% of Realtors reported that clients had not reduced listing prices, the NAR found.
As per the report, in April, the median listing price rose by 2.5% in week 1, 1.6% in week 2 and 0.8% in week 3, compared to the same period in 2019. Though the increases are small for peak spring homebuying season, the overall mood everywhere is still of significant uncertainty. Just before the pandemic started, which was in early March, the median listing prices were up 4.4% year-over-year, according to Realtor.com.
Only a month back, in March, we had 3.4-month worth of supply. This means, it would take approximately just three months for all the homes in the market to be sold. The number had gone down from 3.8 in at the same time last year, indicating that the inventory market was getting tighter as we entered the spring season.
Prior to the pandemic, the U.S. home inventory was too low to meet home buyer demand. This shortage has caused home prices to steadily rise since we came out of the 2008 recession. For over 10 years, the demand has always outpaced supply, according to Realtor.com.
Sometimes when the stock market drops, investors look for safer places to park their wealth. Hence the bond market is currently on the rise.
It is natural to expect that the significant drop in the stock market drop should have the same effect on the housing market. But the data shows otherwise. Many portals that investors use to buy, sell, and search for single-family rental properties and homes for sale have seen huge spikes in web traffic since the outbreak. Some spike could be attributed to shelter in place conditions. But in general, the housing market still seems to be holding its position in place.
Is a new home building being disrupted?
Homebuilder supply lines being disrupted for sure. Almost a third of our home building materials come from China, according to the National Association of Home Builders (NAHB). These supply lines have been disrupted, leading to new home construction disruptions or home renovation progress. However, home builder confidence is significantly up as per NAHB. This signal is good news because it indicates that builders are more inclined to start construction on homes as soon as they can.
But if supply lines are disrupted, which they have been, it would surely dampen the pace of home building. That in turn will lead to inventory shortages and increase in home prices.
As per Robert Dietz, an economist with NAHB, though low-interest rates help support demand, and consumer confidence, the current environment with the pandemic does heighten some of the longer-term challenges on the supply side.
What will the housing recovery look like?
Based on all the current data, the housing market is expected to perform strongly once we are into the post-pandemic economy. Low mortgage rates, low inventory, and demand-driven by millennials aging into homeownership will begin to boost the market when restrictions lift.
Though it is true that the housing market cannot start functioning as normal until the threat of the virus has diminished, it is already showing signs of a bounce back. New home listings have started to increase. Lower mortgage rates are helping the bounce back.