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How Financial Struggles During COVID-19 Will Affect the Real Estate Market

By Thomas O'Shaughnessy | November 24, 2020

Thanks to COVID-19, the economy has taken a turn for the worse, millions of individuals are unemployed, and renters can’t pay their monthly bills. Hopes for a quick recovery disappeared as a second wave of coronavirus is spreading around the globe, particularly in the U.S.

The financial impact of the first wave was relieved with the payments authorized by the CARES Act and subsequent regulations allowing homeowners to defer mortgage and rent payments to the start of the new year — but millions of Americans are hopeful for a second stimulus bill to help them financially.  

The pandemic's affects spared few U.S. residents, especially those working in service industries. Unemployment rate peaked at 14.7% in April and fell almost by half in October. The likelihood of higher unemployment through the first quarter of 2021 is high, however, as more states begin to implement lockdowns once more.

The U.S. Economy Forecast

The negative impact of the economy is likely to continue through the first half of 2021, if not longer. According to the national Association for Business Economists, real Gross Domestic Product (GDP) will grow at a 3.6% rate, one-third lower than predicted at mid-year. 

This is bad news for the average American, who has $41,559 in non-mortgage debt, up more than $7,500 from 2019 alone. Millennials are especially affected, and many continue to struggle with high student debt and supporting a new family.

COVID-19's Impact on the U.S. Real Estate Market

According to the Census Bureau, a house is typically the most valuable single asset the average American owns, accounting for about one-third of their net worth. A home is not only an asset but a path to higher net worth. The average homeowner has a net worth 41 times greater than the average renter. 

With so much at stake, current and potential homeowners are naturally concerned about the impact of COVID-19 on real estate values.

Housing Supply

In a usual falling economy, home prices and interest rates fall, generating a buyer’s market — where more homes are for sale than interested buyers. Surprisingly, the housing market has been a seller’s market throughout 2020, with rising prices and a declining inventory. 

Since the first quarter of 2020, the number of houses in inventory has fallen from 6.8 months of demand to 3.4 months in August. In mid-2020, the nation experienced the lowest level of housing starts in the last five years.

Will home prices hold or continue to rise?  The recession has affected different segments of the population differently. Minorities, people with low and middle income or without a college degree, and single mothers have suffered most and are the slowest to recover. Many of the same demographics are the majority of the renter population. The demand for first homes – starters – is likely to stagnate in 2021 due to the number of renters who will continue to recover financially after the virus.

At the same time, housing supply is likely to increase as struggling homeowners are forced to sell their homes (and pay the costs associated with selling) due to the financial costs of the pandemic and once they can no longer defer their mortgage payments.

Mortgage Interest Rates

Mortgage interest rates have reached 50-year lows, with a 30-year fixed rate of 2.625% versus 3.792% one year ago. The median home price for new residential homes in September 2020 was $326,800. 

In 2019, a 30-year mortgage for $300,000 required monthly payments of $1,396. The same mortgage today requires a monthly payment of $1,206, a decrease of 13.6%. Placing the savings each month into an IRA earning 5% would create a retirement sum of $158,129 when the mortgage was paid.

The low interest rates today are important incentives for home buyers who will disappear as the economy improves — rates will rise, and buyer interest will recede.

Financial Experts Project the Impact of COVID-19 on Real Estate

Financial institutions and wealth managers are especially attuned to the real estate market due to its importance to their clients’ well-being and the industry’s effects on each country’s economy. 

Some institutions commenting on the future of the market include:

  • BNP Paribas: The wealth management firm expects that a real estate downturn will be short-lived due to the historically low interest rates and the low supply of housing and leverage (ratio of debt to value).
  • Federal Reserve Bank of St. Louis: The bank notes that working from home, triggered by the pandemic, is likely to persist, creating demand for home amenities and less importance of location. Although home buyers may be reluctant to act, the limited supply of housing inventory is likely to sustain high prices in the short term.
  • UBS: The Swiss financial institution projects that the global real estate market bubble will burst under the pressure of the pandemic. Mark Hafele, the chief investment officer of UBS Global Wealth Management, claims, “It is uncertain to what extent higher unemployment and the gloomy outlook for household incomes will affect home prices. However, it's clear that the acceleration over the past four quarters is not sustainable in the short run.”

Which of the so-called prognosticators will ultimately prove correct? No one knows. Whatever the macro outcome, individual communities, neighborhoods, and houses will be affected differently.  

Recommendations for Home Buyers and Sellers

Those seeking to buy a home today may pay a little more than waiting a few months. Considering that most houses are homes, rather than investments, passing on a dream location and house makes little sense if you can afford it. A professional real estate agent can assist you to negotiate the best price and save on the ancillary costs of purchase.

When you find the home you want, you will probably be assuming the most significant financial obligation of your life. Understanding the difference between good debt and bad debt will ease your concerns and make the purchase more enjoyable.

If you are a home seller, have you taken the steps to present your property in its most favorable light? Are you most interested in selling it quickly or for the highest price? Are you using the same real estate agent to sell your home and help buy a new one? Combining the two services can save significant amounts of commissions and fees.

Final Thoughts

Many homeowners, after experiencing the consequences of COVID-19, are considering paying off their house mortgage early, eliminating debt just in case. Is paying it early a wise move? That depends on the source of funds and the depth of your concerns. 

Pulling funds from a tax-sheltered retirement account to pay a mortgage, a portion of the monthly payment being tax deductible, is hard to justify financially. On the other hand, peace of mind and sleeping well at night is worth any price. Only you and your family can resolve the tension between the two choices. Either decision will be right — if you carefully consider the consequences of each.

  • One comment on “How Financial Struggles During COVID-19 Will Affect the Real Estate Market”

    1. With unemployment hovering around 7% along with 60% of businesses failing and this second wave of the virus things will hit the fan sooner or later. Most people in the real estate industry (I'm a realtor) push the narrative the markets hot and going nowhere but up, but where will they be when you have 30-40% value reduction lol? Also another common thought with housing economists is when the vaccine rolls out and folks are more confident with putting homes on the market it will cause no more low inventory and prices will fall in competition and less demand,, IMO!

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