Home is Where the Bidding War is
By: Kk Holland
Tags: Covid 19, Economics, Real Estate, Housing

Home is Where the Bidding War is

The spring selling season got off to a late start, and it’s officially bonkers.

Image courtesy of u_f8awlsnb

There has been much speculation regarding the impact of COVID-19 on real estate. While the spring selling season got off to a slow start due to shelter in place orders, with sales resuming the lack of inventory and pent up demand have produced a seller’s market fueling both prices and bidding wars. It remains to be seen what the ultimate impact of COVID-19 will be on real estate. Sales data on home sales tends to lag significantly— and it can take months if not a quarter or two to really see a trend. But in trying to make sense of what we are seeing, there are several issues to consider.

First, as Americans spend more time at home working remotely (and with schools and childcare interrupted) what people need from their home is changing. Competing Zoom calls mean dedicated office space with a door that can close becomes more desirable. With so many of us on top of each other for hours on end, everyone wants more square footage. Outdoor spaces, whether for dining or play, become more important as socializing heads outside and people feel safer hanging at home.

Where that home is also seems to be shifting. New York real estate took a dive, while sales to suburban and even rural areas increased. Density and small spaces, the hallmark of urban living, have become detriments during the pandemic. Sales of second homes are increasing as the wealthy and those with means cancel vacations and seek to secure a location outside of their main city residence.

But while all of these are compelling reasons to explain the intense competition for home sales, there are plenty of reasons for caution. First, while the stock market continues apace, seemingly impervious to reality, high unemployment numbers if they are sustained present a ticking time bomb. Especially as case counts soar and a new wave of closues and shelter-in-place orders are unveiled. While foreclosures are temporarily suspended, selling under duress could rebalance the equation. Already, a number of short term rental investors are finding themselves overextended and unable to make payments on their multiple properties. While some have shifted to long term leases, high unemployment and eviction moratoriums don’t guarantee this strategy will work.

Foreign investment, which has been driving sales in many major markets for the last decade, is threatened with travel and visa restrictions, in addition to economic uncertainty more generally. It’s not yet clear if this trend will continue, or what impact its removal may have on housing markets.

Uncertainty over COVID-19 extends well beyond real estate, but with home sales serving as both an economic indicator and a potential major driver, which way sales are heading is worth paying at least some attention to. Interest rates are at historic lows, and the Fed has signaled this is likely to remain the case for some time. The consensus seems to be that sales will remain strong, with some going so far as to suggest a role for real estate in the recovery. This seems misguided. We’ve been in a situation where home sales took off, but at prices that put them well outside the ability of people to afford them. The idea that we would return to that dynamic seems in no way healthy, especially if it results from a lack of salary for buyers in the first place. It’s possible you could see home ownership levels drop, with investors and second or even third or fourth home buyers accounting for the change, but even that seems unlikely except in a few markets. The argument that the lack of inventory will keep prices from dropping assumes you won’t see household formation trend down, a difficult supposition in an economy being rocked by the disruptions of COVID-19.

It pays to be a bit cautious when everyone thinks they know which way the story is going to end. When everyone thinks they are right, it’s usually the case that no one is. In the meantime, watch the trend line and wait for the data to come in.

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