How COVID-19 is Impacting Real Estate

By Justine Chan | 15 April 2020

The Covid-19 pandemic is the black swan event of our generation. As of mid-April, there are more than 1.6 million cases globally and 100 thousand deaths. The United States is unfortunately the hardest hit country with 500 thousand cases and 18 thousand deaths.

One of the evident effects of the pandemic is the economic fallout. More than 17 million people filed for unemployment benefits in the US in the four weeks leading up to Apr 10, 2020. In the week of March 28 alone, 6.9 million people filed for aid. The immediacy and extent of the layoffs is without precedent. For comparison, the last record set for unemployment filings was in 1982 when filings rose by 695,000. This is an almost 10x that of the last record.

This brings us to the question of what the impact will be on real estate in the US. The jury is still out on the long-term picture and we’re still in early days of decisively knowing anything for certain, even in the short term. We do expect residential housing prices to fall as buyers get cold feet. My personal opinion is that residential real estate will experience mixed impacts, depending on the geographic location of the property. For some markets, I anticipate that real estate will not only recover in the medium to long term, but may even weather the storm better than other types of assets. A key reason is that prior to the pandemic, many residential markets already had tight inventory and high buyer demand. Now, with low mortgage rates and financial intervention from the Fed to stimulate the economy, consumer demand will likely resurface.

Ultimately, Covid-19 will have different impacts for different stakeholders. Let’s break down who those stakeholders are and the impacts on each:

  1. Buyers
  2. Sellers
  3. Homeowners
  4. Renters
  5. Landlords
  6. Real estate investors

Impact for Buyers

Because of the pandemic, the Fed has lowered the benchmark interest rate to zero to spur business lending and economic activity. This has mostly resulted in record-low mortgage rates (note that the rates fluctuate but generally track the benchmark interest rate) resulting in a bonanza for home buyers who can take advantage of these low mortgage rates.

On the flip side, because of the pandemic many Americans have lost their jobs. The government stepped in to mandate that all borrowers with government-backed mortgages be granted a 90-day mortgage forbearance period. The government is also attempting to relieve pressure on borrowers with private loans by encouraging those lenders to provide similar relief measures.

In turn, these measures have spooked lenders and caused liquidity issues since they still have to pay mortgage bond holders. Some lenders have suspended funding for government-backed loans like VA and FHA mortgages while other lenders are tightening lending criteria and pushing out a segment of borrowers who, in a regular market, would have qualified for a loan.

For buyers who are able to obtain funding, this might be an opportune time to find deals, given the downturn and slow market for sales.

Impact for Sellers

Because of the highly contagious nature of the coronavirus, most states have restricted real estate activity to virtual activities only, including showings. Even if in-person showings are allowed, most buyers are not comfortable viewing properties now given the increased chance of being infected. What that means is that sales activity has dropped because most buyers will not purchase a home without doing at least one visit. Virtual sales may be feasible for investment properties, but not for a home that someone intends to personally live in.

Many sellers have decided to not list their property in this market, as there is a lack of demand. According to Redfin, there was a 148% increase in homes being delisted during the week of March 29, 2020. This equated to a total of 28,140 homes. For sellers who need to put their homes up for sale, the median asking price for newly-listed homes was $309,000 or about $21,000 lower than two weeks earlier.

In short, buyer demand has dropped because of employment uncertainties and an inability to view properties in-person. Many sellers have hence pulled their listings off the market if they are financially able to wait out the peak of the pandemic.  

Impact for Homeowners

The pandemic has created record levels of unemployment as most states issued “stay home” orders and businesses shut down. For homeowners who have lost jobs: if you face financial difficulties making a monthly mortgage payment, do not just stop paying your mortgage. Instead, research what options are available to you, then reach out to your lenders to discuss a forbearance agreement or payment plan.

According to the Consumer Finance Protection Bureau, forbearance is when your mortgage servicer or lender allows you to temporarily pay your mortgage at a lower payment or pause paying your mortgage. You will have to pay the payment reduction or the paused payments back later, likely all at once. Be sure you understand the terms of the agreement.

If you have a government-backed loan (e.g. Fannie Mae or Freddie Mac), you can seek forbearance for up to six months, at the end of which you can get another half year of suspended payments. In addition, lenders will not report forborne payments and delinquencies to the credit bureaus, which means that borrowers who request forbearance will not see their credit scores suffer. If you have a private loan, you will have to speak to your lender to discuss your options.

This tracker provides comprehensive options for private lenders.

Impact for Renters

Similarly, the economic downturn has hit renters hard and left many furloughed or unemployed. As of this writing, there isn’t a rent moratorium in the US, so renters have to understand their options if they are unable to pay rent. One immediate option is to communicate the situation with your landlord and see if a plan can be worked out in the short-term. In parallel, research what government assistance you may qualify for that can make up for the lost income. This includes applying for unemployment benefits, especially as the criteria has been expanded due to the pandemic.

In some cities and states, the local government have issued an eviction moratorium, with the majority being for 90 days or more. What this means is that during this period, landlords will not be able to evict their tenants if their tenants do not pay their rent. Note that this doesn’t exclude landlords from evicting their tenants after the moratorium is over.

Impact for Landlords

As some renters are unable to pay rent, and with an eviction moratorium in some cities/states, how should landlords prepare for this?

First, landlords should try to increase their cash buffer in case of reduced rental income and fixed expenses. Alternatively, and only if there is a financial need, landlords can apply for mortgage moratorium to suspend their mortgage payments. This might provide some relieve but it is only temporary.

Last but not least, landlords can also proactively communicate with their tenants to understand which may face issues paying their rent and see if a mutually agreeable solution can be attained for the short term.

Impact for Residential Real Estate Investors

Personally, I think it is too early to predict how the pandemic will affect real estate investors. On the one hand, property prices have fallen and will likely continue to fall, which means there are good deals to be had. Also, borrowing rates are low (because the government is using low rates to prevent a large-scale recession) and therefore the cost to financing rental investment property is also relatively lower. This is good news for investors with longer investment horizons who can wait for the economy to bounce back and enjoyed the low purchase price and locked-in mortgage rate.

On the other hand, an uncertain global economy typically sends investors towards ‘safer’ assets like real estate and the US dollar as currency. This might lead to more investment in certain types of real estate, likely in established markets like New York City with less downside risk.

The calculus for real estate investors, and really for any business person in general, has also changed. The Covid-19 pandemic has halted consumer spending and led to mass layoffs of an unprecedented extent. Some renters may not pay rent for months with an eviction system that may also be severely backed up. Going forward, investors will try to avoid similar situations by either setting more stringent standards for renters or requiring a higher return for taking on this risk.

In terms of living preferences, I anticipate some outward flight from cramped, urban cities and towards larger residential homes that can accommodate a home office or space for working.

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About the Author

Justine is the founder of Live With Plum, the home buying guide for the modern woman. She holds an MBA from Yale and is a real estate investor and licensed real estate agent in New York City.

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