An interesting thing has been happening in the real estate market amidst the COVID-19 pandemic. Home prices are actually continuing to go up while most other economic indicators have been dropping fast. What makes this recession different than what we experienced in 2008?
When the economy collapsed in 2008, the housing market went into a tailspin with home prices crashing. Granted, the real estate and mortgage industries were largely to blame for that recession. This time around, we’re seeing a very different trend when it comes to home prices. They are still on the rise despite what is going on.
The National Association of Realtors (NAR) released its April 2020 data, which shows that the Median Sales Price in the United States rose 7.4% year-on-year. This means that home prices are up 7.4% over April 2019, which is quite amazing! This increase also marks 98 straight months of year-on-year pricing increases, with March data also showing significant price growth.
Let’s look at some of the factors in play:
Supply vs. Demand
The first thing to look at is the supply and demand for housing in America. Naturally, the demand for housing fell as COVID-19 started spreading and state stay-at-home orders were enacted, dramatically hindering the ability to complete real estate transactions in most markets. New home mortgage applications decreased, as did traffic to most major real estate websites like Zillow and Redfin.
Normally, a drop in housing demand would lead to a drop in home prices. However, this situation saw the supply decreasing much faster than the demand. Sellers took their homes off the market and very few new listings were going up in April while most of the country was locked down. The total housing inventory at the end of April was 1.47 million units, which was down 1.3% from March and down 19.7% from April 2019.
The properties that were available found themselves in bidding wars as there was still ample buyer demand because of historically low mortgage rates. The housing demand outweighed the supply and this kept prices driving upward.
What Makes This Recession Different?
The truth is that recessions don’t always lead to drops in home prices. In fact, they often have the opposite effect. In 1990, we saw only a slight drop (less than a percent) during that recession. In 2008, we saw a huge drop because of the subprime mortgage fiasco and housing bubble that was destined to burst. During three other recessions in the past few decades, however, housing prices actually went up.
One of the biggest questions people have right now is if there is going to be another foreclosure crisis as a result of the COVID-19 recession. Most experts say no. Remember that in 2008, borrowers were able to get mortgages way higher than they could afford. This led to a significant amount of negative equity. Once home prices went down, they were in way too far over their heads.
Homeowners Have Better Equity
Today’s situation is much different as the numbers show that nearly 40% of homeowners own their homes outright with no mortgage left to pay. Meanwhile, homeowners with existing mortgages are benefitting from excellent equity as home prices have been going up steadily month after month and year after year across the country. Of course, there is also a moratorium on foreclosures right now to protect people who have lost their jobs or had wages reduced as a result of COVID-19. Many have taken advantage of forbearance to delay mortgage payments as needed.
Many other homeowners have already taken advantage of refinancing while the mortgage rates are so low, and the rising home prices are a benefit here, as well. This gives people better ability to qualify for favorable refinance terms, as well as explore additional options such as home equity lines of credit (HELOCs) and cash-out refinances.
There is still a chance we see a drop in home prices before this pandemic is said and done. We don’t know exactly what the future has in store because there is still so much uncertainty ahead of us. Given that we saw housing prices rise during the past two months of lockdown, it’s likely that we see more home price increases in the coming months as real estate markets are opened up and making up for lost time. This may be a highly active summer market!
If you are ready to make your move or are interested in exploring your home refinancing options, call me today at (858) 761-7795 or email me at email@example.com