According to the experts, the United States officially entered into a recession in February 2020. With economic turmoil and record-high job losses, it’s not difficult to see the ripple effects of recession spread out into the areas of our lives.
If not you, you probably know someone — someone who lost a job, suffered when the stock market crashed, or who was otherwise impacted by COVID-19 and the recession it caused.
That said, you wouldn’t know it if you looked solely at the real estate market. Despite fears, the real estate market, on the whole, has been largely untouched by COVID-19 and the recession in terms of value. True, there were a few months of halted homebuying transactions. Hitting pause on real estate, however, did nothing but store up demand.
We saw that the summer homebuying season — the busiest season in real estate — kicked off with a bang. And by a bang, we mean by a 4.3 percent rise in median prices. That’s just about at the pace we saw pre-COVID lockdown, which was 4.5 percent growth year-over-year.
Despite a drastic shift in the number of actual real estate transactions, we’re not seeing it affect demand in any real way. While experts don’t expect a record-breaking summer by any means, indicators are pointing to far better results than were feared.
But why is real estate defying the dismal conditions of the economy at-large? And more importantly, how will it impact the economy — and our investments — moving forward?
The Big Indicator that Real Estate Will Lead the Way Out of the Recession
It’s difficult to talk about the reasons for the real estate market’s role in recovery when they culminate as one major idea. It’s the balance of supply-and-demand that will not only sustain the real estate market as we know it but help stimulate much-needed economic activity. Let’s address a few facets of this idea:
What’s Happening to Housing Supply?
We would have thought that the sudden fears, aversion, and regulations against home tours and open houses would have deterred potential buyers. Yes, it did slow the market down. But we did not see home prices drop in a response to lacking demand. That’s because market supply reacted accordingly, too.
In many cases, sellers pulled their listing from the market in part to similar pandemic fears, and in part to wait until it was more possible to sell one’s home in a more traditional manner.
At the same time, home-builders experienced faltering confidence that led to a reduction of new homes on the market and decreased building permits. This trend moved with depressed demand, which allowed home prices to maintain — and even grow.
Market health, in general, can be chalked up to that sustained balance of supply and demand. During the Great Recession, this wasn’t the case at all. A massive stock of vacant and foreclosed properties meant that there was far more supply than demand.
Right now, supply is still tight and getting tighter as sellers opt to wait and builders need a boost. Low interest rates are a huge incentive, but their impact only goes so far when lenders are more strict on homebuyers and builders alike. Ultimately, supply is tight — even in light of reduced demand — and we can expect continued growth in home prices.
What’s Happening to Housing Demand?
While demand fell off during pandemic lockdowns, the desire to buy real estate did not diminish. Thanks to an agile and innovative market, sellers and agents were able to utilize virtual home touring and scheduled appointments for serious inquiries. While the housing market “paused” for a good chunk of time, it didn’t diminish the fervor for property.
With interest rates as low as they are, it’s an appealing time to buy. Plus, buyers can afford more house for their money with low interest rates. Tight inventory is what keeps prices going up even as demand in certain sectors — such as luxury real estate — diminishes.
Be sure to check out: Lessons from Post-Lockdown Global Housing Markets
What’s keeping demand from going crazy, though, and driving prices even higher? The answer is in the lenders. If we look at the Mortgage-Credit Availability Index, we see the sharp drop in access this year. That’s because economic turmoil has led to many homeowners to fall into forbearance or other statuses of non-payment on their mortgages.
In response, lenders have tightened their lending standards, including down payment and credit score requirements. This is keeping some would-be homebuyers out of true market activity.
While helpful in balancing supply and demand in some regards, the tough lending standards, if they persist, could have a negative impact on the market in time.
What about Real Estate Investors?
Real estate investors tend to have no trouble securing financing, thanks to their diligence in preserving excellent credit scores and access to down payment funds. Securing financing won’t be a problem. Inventory, however, is another issue. It’s tight for everyone, and that means competition.
At the same time, demand for rental properties — particularly single-family homes — is likely to surge. On one hand, homebuyers may not be able to obtain mortgage approval, leaving them to rent. By the same token, the tight and competitive market means that sellers may not necessarily be able to find a new property for themselves — leaving them to rent for a time.
Investors play an important role in not only market stimulation, but services rendered in their communities. Housing is essential. Rental demand will always exist.
For now, a steady path and a level head are all real estate investors really need to remain on the right course.
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