Most housing economists predicted that the spread of the COVID-19 virus last spring would paralyze housing markets. For about six weeks, they were right. Sellers stopped listing homes, and buyers struggled with the new realities of home buying like virtual house tours and e-closings. By the end of April, a new dynamic emerged. Real estate agents quickly mastered new technology so that homes could still be sold during lockdowns. Thousands of buyers became active, including many millennials who learned to hate their apartments during lockdowns, move up buyers then joined first-time buyers, and seemingly overnight, real estate was booming.
In June and July, home sales set month-over-month records. Suddenly, competition was so stiff that for three straight months, new listings failed to keep up, trailing 2019 levels by 20%. The combination of strong demand and weak supply sent prices soaring. Prices rose 8.5% in July after a 3.5% hike in June. Real estate’s recovery was so fast that sales between February and June look like a sharp “V” on a graph.
What if We Experience a Second Wave of COVID-19?
Since April, the CDC’s Director, Robert Redfield, has warned of a second wave of the virus arriving in the fall or winter. With the colder weather and the flu season, he warned that a second wave could be worse than the first one.
Will that be true for real estate as well? Or will sales recover more slowly than they did in the spring, changing from that sharp “V” to a smoother “U”? There’s a chance that they might fall and not recover anytime soon.
Ralph McLaughlin, the chief economist at Haus and former deputy chief economist at CoreLogic, has a different shape in mind. He expects the first wave will follow the second closely, and the two waves together will create what he calls a “Flying W.”
“You can think of it as really two “Vs” next to each other,” says McLaughlin, referring to the first wave in the spring, “where the initial drop in activity due to the pandemic is sharp and severe, followed by a rebound to near pre-pandemic levels, and then the process repeats itself until we’ve recovered sometime next year.”
3 Reasons Why We May Experience the Same “Boom” in Housing
“We think the process will repeat itself for a second time for three reasons. First, we think the initial rebound is simply due to pent-up demand for home buying that would have otherwise occurred in March, April, and May but will be pushed to June, July, and August,” McLaughlin predicted in June. “But after that, we’re not expecting new demand to replace it at comparable levels, which will lead to another drop in activity.”
“Second, .., is that the virus will make a comeback, which will lead to less demand for homebuying in the fall. [And] third, there’s a possibility that we’ll see a broader impact on housing demand, including rentals.”
Possible Slow Spring Season for Real Estate
Two years ago, the Urban Institute estimated some 19 million Millennials were still renting because they didn’t have enough saved for down payments. That’s the equivalent of the number of homes sold in America for over three years. Assuming that by now, a large percentage of those young buyers have either bought or are still not ready, it is reasonable to think that there will be no pent-up demand extending into the second wave.
The spring surge in demand will probably not repeat though interest rates will remain remarkably low. The pandemic economy will take a toll on buyers in the last half of the year; unemployment will still be higher than before the pandemic arrived and many first-time buyers have used their down payment savings to pay monthly bills. Prices will stop rising so quickly but they are already high enough to keep large numbers of first-time buyers out of the market.
The seasonality of real estate markets worked in favor of the spring boom, which began precisely at the time of the year when the spring sales market traditionally opens. In the fall, demand traditionally wanes along with the supply of homes for sale. With just ten weeks before Thanksgiving and the opening of the holiday season, sellers don’t have much time to market their properties. Many sellers pull their listings in the fall and wait for spring the following year.
McLaughlin agrees. “On the demand side, we expect uncertainty over the prospects of the U.S. economy, fears overexposure to the virus during the homebuying process, and tightening of credit standards to dampen demand for homes in the short run. At the same time, we expect home sellers–who often are also buyers–to hold back on listing their homes because of concerns over their ability to sell and purchase another home. Our forecasts suggest this reduction in both demand and supply will lead to a reduction of home sales and purchase mortgage origination between about 38% and 45%, respectively.”
Some economists are even more negative on a second wave. Lawrence Yun, of the National Association of Realtors, warns that a second wave of the coronavirus could stall the recovery. “One of my biggest concerns is a second outbreak of the coronavirus and a second lockdown,will be completely demoralizing, create more economic damage, and people will remain unemployed for much longer,” says Yun.