Real Estate by Nick Abbadessa
Nick Abbadessa

How the CoronaVirus (COVID-19) Impacts Home Prices

CoronaVirus Home Values

With the pandemic surrounding the CoronaVirus (COVID-19), you may be wondering what impact it will have on home values. Understandably, if you are in the market to purchase a home, you are probably hoping for major home price reductions. If you are looking to sell, on the other hand, you are hoping for an increase in home values.

Well, although today’s pandemic may be placing a strain on the economy, financial experts are considering it V-shaped. In other words, they are foreseeing a sharp recession with such a quick recovery that we will see very little damage to home prices.

Reason being, we live in an economy of supply and demand, where prices are determined based on an item’s availability in relation to the number of consumers who want it. In respect to real estate, we look at a month’s supply of real estate inventory. During a normal market, there are six to seven months of available inventory. Accordingly, anything more than seven months is considered a buyers’ market (thus driving prices down), and anything under six months is considered a sellers’ market (thus driving prices up).

Currently, although buyers’ demand has increased due to the pandemic, the number of homes for sale has also decreased. According to the National Association of Realtors (NAR), we are currently at 3.4 inventory. Therefore, since inventory is below the six months threshold, we would consider this a seller’s market and foresee homes maintaining their values during the CoronaVirus (COVID-19) pandemic.

Furthermore, as California now is implementing the best strategy to slowly and safely reopen the state, many are wondering how the economy will recover. As mentioned above, experts are foreseeing a V-shaped recovery. Again, that is, they foresee a period where the economy does experience a sharp decline, however, the decline will be short lived as it will be followed by a strong recovery. For instance, the experts are saying:

Historical analysis showed us that pandemics are usually V-shaped (sharp recessions that recover quickly enough to provide little damage to home prices), and some very cutting-edge search engine analysis by our Information Management team showed the current slowdown is playing out similarly thus far.
~John Burns Consulting

It’s worth looking back at history to place the potential impact path of Covid-19 empirically. In fact, V-shapes monopolize the empirical landscape of prior shocks, including epidemics such as SARS, the 1968 H3N2 (“Hong Kong”) flu, 1958 H2N2 (“Asian”) flu, and 1918 Spanish flu.
~Harvard Business Review

The fiscal stimulus provided by the CARES Act will mute the impact that the economic shock has on house prices. Additionally, forbearance and foreclosure mitigation programs will limit the fire sale contagion effect on house prices. We forecast house prices to fall 0.5 percentage points over the next four quarters. Two forces prevent a collapse in house prices. First, as we indicated in our earlier research report, U.S. housing markets face a large supply deficit. Second, population growth and pent up household formations provide a tailwind to housing demand. Price growth accelerates back towards a long-run trend of between 2 and 3% per year.
~Freddie Mac

In short, while the pandemic has raised economic concerns, it appears that home prices will remain steady during this V-shaped event.

As always, if you need any help listing or buying a home, please don’t hesitate to reach out.

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