The novel coronavirus pandemic has literally gone viral and real estate sector is also getting impacted by it. Due to Covid-19 outbreak the new home sales dropped in February. Today, we decided to take a look at the short-term impact of the coronavirus pandemic on the California housing market. We’ll also look at the likely medium and long-term effects of the outbreak.
Before the coronavirus outbreak, the declining interest rates bolstered February home sales and price in California, according to C.A.R. The no. of home sales in February went up 6.6 percent from the 395,700 level in January, marking the first time in three months that sales jumped above the 400,000 benchmark. February also marked the eighth consecutive month of year-over-year sales increases.
As the coronavirus pandemic worsens, the sales activity in the California housing market is expected to decline in the coming months, particularly in cities with a “stay at home” mandate. This is because of open houses and home showings which are impossible be held in such conditions.
“Additionally, sales in escrow may be delayed by the closure or limited availability of all the essential services related to a home sale, such as financing, title, escrow, recording or by buyers who may have backed out of a purchase due to coronavirus concerns,” according to C.A.R. President Jeanne Radsick.
According to a United States Department of Commerce report, the median price nationwide for a home sold in February was $345,900, up 6.3 percent from January. It’s unclear how the coronavirus will impact numbers for the month of March. But many experts say that these effects are short-lived, and when it ends, it would bounce back.
The most important thing to remember is that it is a health crisis – not an economic one. This pattern differs from a standard economic recession, which is a situation in which economic activity falls for 6-18 months and then recovers more slowly. According to Aaron Kirman, host of CNBC’s Listing Impossible, “while the lasting effect of the coronavirus pandemic is still unknown, when the pandemic eventually comes to an end, it’s going to be a buyers’ market.”
Immediate Impact of Covid-19 On California Housing Market
The short-term impact of the coronavirus on the California housing market is that realtors are canceling their open houses and half of all agents reported a drop in buyer interest. A flash poll conducted by C.A.R. between March 14-16 found that 54% of realtors had buyers who backed out from buying a home because of the coronavirus, and about 45% had sellers who backed out from selling a property.
The pandemic further impacted buying or selling of a house as California issued a statewide ‘stay at home’ order on March 19 to slow the spread of the coronavirus. All non-essential businesses were essentially shut down. The real estate industry and many businesses that support it have been deemed non-essential.
Real estate transactions like home buying, title research, residential leasing and renting were allowed to continue. So were things like building maintenance and cleaning. Home construction was typically allowed to continue, as well. This meant that people could continue to live in their apartment and call the property manager to get the plumbing fixed.
Home sales and purchases already begun could be completed. However, it became much more difficult to arrange open houses or take photos of a property for sale. Some realtors adapted by setting up virtual showings of properties, whether it was via cell phone video, high resolution photos or drone.
However, photographers can’t travel to properties, while stagers and appraisers can’t travel to homes that owners want to sell. This will freeze the housing market for the most part until the shelter-in-place orders are lifted. Financial services are considered essential; this includes banks and mortgage lenders.
Unfortunately, the shutdown of up to 80 percent of the country means many are afraid to take out a home loan even if they still have a job. That is why mortgage applications fell by 30 percent in the last quarter of March, 2020 while unemployment applications hit a record three million.
If new coronavirus cases are detected in California and ‘shelter-in-place’ mandate is extended for a few more weeks, a sharp sales decline will result in an increase in unsold inventory in the short term – leading to a buyers’ market. Many potential sellers will likely delay putting their homes on the market, which may lead to fewer new listings. Some of the buyers would exit and decide to not enter the market due to their weak financial condition.
The Medium-Range Effects of Coronavirus on California Housing Market
If there is a wave of job losses nationwide, this will create many distressed home sellers in the California real estate market, as well. Yet this is a buying opportunity for investors who have financing. The slowdown in what is normally a busy season will cause some realtors to go out of business. Mortgage brokers and lenders will experience a boom in business, since record low interest rates cause a spike in mortgage refinances.
We’ll also see a flurry of activity in the California real estate market as people pick up where they left off. For example, those who wanted to move before school starts in the fall aren’t going to wait another year to see what the housing market is going to do. They’ll rush to showings and try to close on a property, as long as their personal financial situation is stable.
We can expect the summer of 2020 to see record activity in the California housing market due to the shift of spring activity to the summer along with the standard spike in real estate transactions before the school year starts. On top of this are the young graduates and couples that want to buy their own homes.
Plus there will be long-term renters who recognize the opportunity that 3 percent 15 year mortgage rates represent, searching for homes once they can be pre-approved for a mortgage and visit properties. California home prices will probably stabilize or rise, because many sellers have taken their homes off the market until the housing market seems to be active again.
The Likely Long-Term Impact of Coronavirus on California Real Estate Market
The Fed has lowered interest rates to nearly nothing. This has been done to stimulate the economy. Once the unprecedented lockdown is over, people will start returning to work in mass, though some will have to find new jobs. There will be a slower economy for a while, but a number of ongoing trends aren’t going to reverse themselves.
Millennials will want to move out of their parents’ homes and into their own. We can’t say there will be a coronavirus baby boom, but many families having been stuck inside with their kids will decide they want a larger home, yard, or both. We can talk about the many people who’ve moved out of California for other states.
Yet the state continues to attract immigrants from around the world. And young native born Americans flock here for the high paying jobs, as well. That isn’t going to change due to the Wuhan virus. Tech giants expanding to Seattle or Portland haven’t relocated their development hubs out of Silicon Valley.
A dip in home prices in overpriced housing markets like San Francisco and Los Angeles will soon result in a wave of purchasing activity, given pent-up demand. After all, there are many renters who want to own, and many want to stay in the area. Furthermore, the demand for rentals in the California housing market remains strong.
This is why we don’t expect to see a decline in monthly rents, though housing prices may fall significantly before shooting back up. A secondary effect of the Wuhan coronavirus outbreak is that it has crimped supply chains around the world and slowed down construction. This will drive up the value of both new and existing properties in the California housing market, since the supply of new and redeveloped properties has been stifled.
And there is certainly the possibility the California housing market will see bidding wars on the few available and desirable properties by people who have more margin thanks to a 3.25 mortgage rate. We can expect a few shifts in the California housing market long-term. Realtors will probably continue to utilize 3D virtual tours, using 360 cameras to capture images of every room in the house.
This helps them sell the home 24x7x365, whether or not everyone is stuck at home. While appraisers, stagers and construction crews can’t work remotely, we can expect far more back office work in the real estate industry to be done remotely because that’s become commonplace. We can also expect online contract reviews and digital signatures to become the norm, because it allows real estate transactions to move forward though some of the participants are at home.
Demand for housing was very strong before the coronavirus hit the U.S. This pandemic is not expected to last nearly as long as the United States subprime mortgage crisis, which was a nationwide financial crisis, occurring between 2007 and 2010. As this crisis begins to end in a few months from now, the pent-up demand from the spring buying season will help to fully recover the real estate sales.
The California housing market will bounce back, too. It is going to see a drop in activity and prices until this real estate freeze thaws. However, we can expect the California housing market to rebound by the fall. This creates a unique buying opportunity for those able to do so. Some of the realtors see no decline in their businesses even now. According to them the real estate sector is really active even in this pandemic.
The way of operating business has changed. People are working from home. They are using applications like FaceTime to show buyers homes instead of traditional open houses. Lenders are experiencing a surge in demand as opportunistic buyers move to take advantage of low mortgage rates.
Brett Jennings, founder of Real Estate Experts, writes, “our market is still thriving” in Santa Clara County, seeing only a few cancellations despite shelter-in-place conditions and the fact that “we have one of the highest counts of active COVID-19 cases in California.”
According to Dr. Svenja Gudell, the chief economist of Zillow Group, when they examined pandemic histories ranging from the 1918 flu epidemic to the 2003 SARS outbreak, they noted that economies “snapped back quickly once the epidemic was over.”
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- Short-term effects
- Medium term effects
- Long-term effects