People ask every day about how residential real estate will perform amidst the coronavirus and pandemic backdrop. Some folks (buyers and investors) are hoping to score a deep discount on property. Will they be able to do this? It appears that so far, this is “wishful thinking” as homes are still receiving multiple offers, all-cash offers, and selling in days and, in many cases, in hours.
A recent article in The Wall Street Journal highlights how strong the real estate market in Seattle is doing despite being considered the coronavirus epicenter in the US only 4 or 5 weeks ago. Another WSJ article, titled “Why Home Prices are Rising during the Pandemic”, has reported that nationwide home prices increased 4.5% from March 2019 to March 2020. They predict that home prices will increase .5% from March 2020 to March 2021, but not all markets may come out ahead. Houston, Miami, and Las Vegas are expected to decline, but other markets will increase, particularly with diversified economic drivers and a strong tech presence.
Utah is one market that is expected to continue to do well. Along the Wasatch Front, we actually have more homes under contract now, than we did a year ago at the same time.
Despite residential real estate holding its value, retail space and some new developments across the country have been negatively impacted due to uncertainty, particularly around the timing of when everything is scheduled to open up and questions around employment and how the recovery will look. Will the economic recovery look like a V, a U, or a Nike Swoosh? These are debates for economists and policymakers.
Here are seven surprises in the real estate market.
1. A Chronic Undersupply of Housing
We have a chronic undersupply of housing across the country, particularly affordable housing in certain areas including Seattle, Reno, Boise, Salt Lake City, and other fast-growing locations. This is especially true of cities and metro areas that have a large tech presence, such as the Silicon Slopes of Northern Utah. Many tech companies have seemed to weather the storm and poised to come out of this stronger than ever. For evidence of this, look at the market cap of Zoom compared to the combined market cap of the US automakers during the last couple of weeks.
2. Demand and Supply have been Impacted
While demand has been impacted significantly (especially in areas where real estate activities such as showings and transactions were restricted), supply has been impacted as well. In many markets, we had record low levels of inventory before the pandemic and now many sellers have decided to stay put or delay the sale of their house further constraining inventory supply. These supply constraints make it harder for buyers to find properties and drive values up. Many homeowners are surprised to see the value of their property not only hold strong, but also increase. You can get an instant home valuation on your home here.
3. People are Reconsidering What They Want from Home
With more people staying at home and spending much more time at home than ever before, some people have reconsidered the kind of home and space they want to be in. Property owners are putting in extra time and investment into the yard or into different parts of the house to more fully enjoy it. Others are planning to build a new house given the amount of time spent at home. With Stay-at-Home-Orders and Directives, homeowners have had to create makeshift work spaces and makeshift desk stations for kids. While some of these modifications aren’t going to impact house values, some of the landscaping projects, additions, or other improvements can add significant value to a home. I’ll talk about this last point in a future article.
4. More Households per Housing Unit
In Utah, we have more households per housing unit than at any time in our history, with people either having family move in with them or renting out their basement. I know of several situations where you have 3 generations of family living in the same home. Much of this is due to the lack of affordable housing. Some enterprising individuals have learned that they can get a nicer home in a nicer neighborhood and significantly reduce their mortgage by renting out the basement by buying a home with a mother-in-law apartment.
5. Real Estate Hedges Inflation
Real Estate is a natural inflation hedge. With the trillions of dollars the Federal Government has put into the economy, it is likely that we will experience serious inflation. Real estate is a natural hedge against inflation and typically goes up at inflation or a point or two above it.
6. In Periods of Recession, Rent Goes Up
While it may seem counter-intuitive, many people don’t realize that in periods of recession, rents typically go up. While this time is unique, I wouldn’t be surprised to see rents go up again.
7. Multi-family Units as Investment
During the last recession, one of the best investments turned out to be privately held multifamily real estate projects. These investments tend to be recession resistant and as long as they don’t have high leverage or short-term debt can be a great place to park resources for the long haul.