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COVID-19 causes home prices to go up?

As counter intuitive as it sounds, it is true. We are facing a world-wide pandemic during a financial recession, yet due to unbelievably low housing inventory home prices are temporarily seeing a bump due to buyer demand.


Earlier this year, and prior to the pandemic, we were sharing that our market was transitioning out of the strong seller’s market that we have been in for years and in to a more balanced market where buyer demand and housing supply were more even. Then all of a sudden COVID-19 caused the seasonal spring wave of new housing inventory to stop. Understandably, many homeowners were not comfortable offering their home for sale during the stay-at-home order when uncertainty was running rampant. Think of it this way – COVID-19 essentially hit the pause button on the real estate market for a couple of months. Now that we are on the other side of the stay-at-home period, potential home buyers are ready to purchase a home, yet there is simply not enough housing inventory available. Bidding wars and multiple offer situations are now back in the picture and the sellers that are on the market today are eating it up!


The graph below shows that the number of new homes to hit the market in May 2020 was down 23.1% when compared to May 2019 (down from 581 to 447). As you can see, historically new housing inventory will stair step up from the beginning of the year till May and then slowly step down from there. This year we started up (slowly) but then dropped off in April and May did not see the surge that we anticipated.




But how long will this demand last? That is hard to say. With unemployment still in the double digits and what appears to be a second wave of COVID -19 building, it simply cannot last long. Another factor that will definitely impact home values in the future is the mortgage delinquency rate. Yes, there is currently a moratorium on mortgage foreclosures, however, that stops at the end of August. So what happens then? That is a good question. I wish I had the answer. We do know that the mortgage delinquency rate is on the rise. According to Hard Wire, the US mortgage delinquency rate rose to 7.76% in May. That is more than double the rate that we saw at the beginning of the pandemic in March when the delinquency rate was 3.39%. In real numbers, there were 4.12 million mortgages in the U.S. that had payments more than 30 days overdue in May. Delinquencies of more than 90 days but not yet in foreclosure have increased by more than 50% in the last 60 days.


If the moratorium is allowed to expire, distressed properties hitting the market will not only provide buyers with more affordable housing options, they will also most likely cause median home prices to drop. The amount of the drop will depend upon the size of the distressed property wave. Small wave=small drop. Big wave=big drop.

Recently I have spoken with appraisers who have expressed a specific concern with the current market. Although homes are oftentimes selling for more than the list price, if the overage is significantly over list price the appraisers are under tremendous pressure from the lender to justify the appraised value with actual sold comparable homes. High demand and low supply is not enough justification for the appraiser or the lender to support a sales price that is way over list price. If actual sold comparables in the area don’t exist, then the home is at risk of appraising for less than the contract sales price. When this occurs either the seller has to drop the price to meet the appraised value, the buyer has to bring more cash to the closing table to cover the deficit, a mix of the two, or the buyer reserves the right to cancel. Regardless of the solution, under-appraising is never a good thing.


So what is the take away? It appears that this supernova seller’s market that we are seeing will be short-lived. That being said, it is creating some great financial opportunities for home owners. On the flip side, it can be a very difficult and competitive market for home buyers to navigate. My best advice for home buyers is to search for and tour homes 5% below the ceiling of your financial comfort zone. This should allow you some room to increase your offer if you find yourself in a multiple offer situation. If you only look at homes at the top of your comfort zone, you may find yourself getting out bid over and over again. That is not the goal.

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