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by Keith Trainor

Original article posted in Linkedin on 4/15/2020

The covid-19 pandemic is giving rise to two main stories in the local real estate market: how business is conducted day-to-day, and what we are seeing in terms of market forces on price and on buyer/seller sentiment.

The question of how we are doing business is interesting, but it is also welldocumented elsewhere. Realtors are taking 3D footage of their listings (example), conducting virtual tours and walkthroughs via FaceTime and Zoom calls, and following county and state guidelines for when and how to make properties available. Vacant homes are much easier to sell than occupied ones. Masks, gloves, lysol wipes, and hand sanitizer have become tools of the trade, as much as lockboxes and booties ever were. Coronavirus addenda and advisories are now boilerplate paperwork in transactions. In short, the real estate industry has adapted to its future remarkably quickly, and has implemented the practices that will constitute the post-covid standard operating procedures, as society learns to live with this disease for the long haul.

The question of what we are seeing is a much richer question, with many more implications for the future of market behavior. In this article, I’ll outline a few trends that we are seeing, and offer an over-arching interpretation of what is happening. In my next article, I will suggest what can be reasonably expected to occur in 2020.

I. The Decline of Ready/Willing/Able Buyers: This decline is manifestly obvious in the data. The narrative support of why such a decline is occurring is straightforward. There are fewer “ready” buyers, because homes have been less showable during shelter-in-place, and so buyers are having a difficult time reaching the point in the process when they typically write offers. There are fewer “willing” buyers, because consumer confidence is down, and some imagine that prices may be about to drop, so why not just wait. And there are fewer “able” buyers, because of stock market losses drying up down payments, and also local job and income loss taking some buyers out of the market. For these reasons, we see a drastic slowdown of sales (notice particularly the year-over-year comparison).

II. Flat-lining of Inventory: The number of homes on the market has not changed substantially during the past month and a half. Sellers are holding off on listing their homes, for several reasons. It is more difficult to line up vendors, and many categories of vendors (such as home staging) are deemed non-essential services in support of real estate transactions. Owner-occupied homes aren’t listing, because the real estate industry still hasn’t identified a way to safely show and sell these homes. There is also a narrative persisting among some sellers that the economic effects of the coronavirus will “blow over,” and the market will make a V-shaped recovery to pick up where it left off. These sellers too have decided not to list, out of a feeling of optimism. The net effect is far fewer new listings than we normally see this time of year.

III. Volatility of Interest Rates: When the covid news gained national prominence in the US and started to rattle the markets, this occurred at the same time as an historic interest rate decline. For the first weeks of March (before the shelter-in-place), there was a general feeling of unease, but the real estate market was largely unaffected. Buyers who had been competing with other buyers and getting out-bid were suddenly finding that they could get into contract, and as an added bonus, interest rates and therefore monthly payments were lower than expected, which was a win. This propped up the market for the early part of March. It was an eerie calm, but it was business-as-usual in the beginning, before the SIP.

Interest rates have been volatile since then. From March 10 to March 20, rates increased by more than 3/4 of a percentage point. They have since settled again, but not equally across the board. In particular, jumbo rates have climbed, while conforming loans have remained low. Lenders are returning to stricter guidelines, higher down payment requirements, and so on, to brace for uncertain times. This is typically a prelude to interest rate increases. As unemployment, mortgage defaults, and loan forbearance requests cascade throughout the mortgage markets, investors are going to need to offset that risk and find their returns somewhere — I believe that somewhere will be rate increases later this year.

IV. The Continued Presence of Market Participants: Although there has been a decline in the absolute numbers of buyers and sellers, there are still active buyers and sellers participating in the market, for whom it makes all the sense in the world to continue to transact.

For example, due to low interest rates and lack of competition, if a buyer is looking for a longterm “forever home,” and they find the right one at a monthly payment within their comfort level, there is no explicit benefit to waiting. For sellers who are relocating or heirs who inherited a vacant home, there is no certain benefit to waiting to list with everyone else later this summer. The MLS has frozen “days on market” tallies, which means there is nothing lost by market exposing now (provided they don’t undercut themselves). If a property fits such a profile that prospective rents for the home would exceed monthly payment for ownership, then in most scenarios, it makes sense for a buyer to consider such a property as being insulated from risk. For leveraged buyers who need a large loan, it may make sense to buy now instead of waiting for an uncertain future to arrive, possibly with higher rates or tighter lending guidelines. For anyone doing a buy/sell, particularly an upsize into a larger home, this market provides an opportunity to try to get the best end of it in both transactions, if well-orchestrated, while also taking advantage of known rates. At worst, buying and selling into the same market has a neutralizing effect.

Therefore, although the market has shrunk, it is populated with participants who are acting rationally and in their own best interest. This is supporting valuations even during a period of lesser volume. This is important to keep in mind, as with any market, that any “sale” is also a “buy” for someone. Real estate is not as volatile as other classes of investment or asset, in part for reasons such as these.

Closing Thoughts:

We are familiar with a market in which buyer and seller activity are artificially suppressed by external forces. We call it “The Holidays” and it happens every December. In some regards, what we are seeing now is similar. Price movement has been downward, but not drastically, because inventory is limited, and because there is fundamental demand for housing, ready to catch the decline.

Prices decline through two mechanisms, one is days on market (DOM) and the other is increasing inventory undercutting each other with price drops. By definition, DOM operates slowly on prices, that is, because it requires a high number of “days” to elapse. And meanwhile, an inventory surge has not occurred. So while we are seeing price declines in the neighborhood of 5%, for homes that would have sold quickly with multiple offers two months ago, we have not yet seen the conditions occur for larger price movements than that.

Future Expectations:

In my next article, I will synthesize these observations along with some anecdotes to make a case for the direction I see the market headed in different classes of property in the coming months ahead. I’ll link to it here when it’s live. (Spoiler alert: keep watching the number of active listings on the market.) Thanks for reading.

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