The Post-Pandemic Real Estate Market
Home prices continue to rise while interest rates remain low, so why is there low housing inventory on the market? Higher home prices should encourage more sellers. The concern some would-be-sellers face is what happens to them after escrow closes. If the profitable seller does not have anything more than the equity left from their sale, they could find themselves being priced out of the market or forced to make a lateral move as a would-be buyer. On the flip side for buyers, low inventory results in bidding wars that drive up home prices and force some risk-takers to forgo inspections and waive contingencies.
Eventually, the market will correct itself after a supply surplus drives down home costs caused by pent-up demand. This article explores various factors driving California’s inflated home prices and why conservative buyers and sellers may see a glimmer of hope soon.
Pandemic Induced Changes On Local Housing Supply
On May 12, 2021, the California Department of Public Health updated its guidance for the real estate industry re-allowing open houses, making it easier for buyers to view homes in-person rather than pine over pictures and drone footage. Adding this change into the recent post-pandemic reopening consumers should start to see more homes come into the marketplace. Since supply and demand have played a big part in price increases, forcing quick closings, it is reasonable to expect the market to cool off and for houses to remain on the market longer after new inventory trickles in. This will allow buyers to regain some of their purchasing power.
Real estate economists are split on whether the market will correct itself or if it will continue to increase due to a surge in consumer confidence. Before the pandemic, urban mixed-use dwellings were all the rage. Luxury condos stacked on trendy markets and drycleaners offered all the conveniences of modern life without the headache of maintaining a yard. However, the current trend towards lower density areas and robust at-home-office space post-lock-down have given a fresh spin on marketability. Businesses have proven their ability to function profitably while employees work from home; this will likely remain the status quo. With that said, the quantity and quality of the job market are large factors in consumer real estate confidence. Working from home has taken on a new meaning – allowing some buyers to shop outside of the same zip code as their employer.
Construction Cost
Astonishingly high construction material costs directly correlate to overly inflated home prices and some would-be seller’s unwillingness to make repairs before the sale. Everything from steel, lumber, crude oil (used in paint), copper, to chlorine tablets for your pool, are either highly inflated in price, impossible to locate, or both. For instance, the National Association of Home Builders reported that since mid-April 2020, lumber prices rose by 130%, which the Wall Street Journal blamed for the $25,000+ increased cost of residential homes.
While the majority of contractors estimate the shortage of building materials will continue through the fall of 2021, optimism is strong due to contractors passing the costs onto affluent consumers. The high cost associated with new construction, remodeling, and simple improvements has priced out a large chunk of homeowners from the market; this adds to the scarcity of homes for sale.
The material shortages may continue for an uncertain amount of time due to the continuation of certain National Security tariffs. Construction costs may be the obstacles preventing some sellers from going on the market and relieving the pent-up demand. The longer the price of construction materials continues to increase, the more homes may be listed for lower prices due to unfinished, or much-needed, renovations.
Impact Of The Moratorium
On June 25, 2021, Governor Newson announced he intends to extend California’s eviction moratorium from June 30th to September 30, 2021, according to Assembly Bill 832. This bill allows for past rent to be repaid to landowners through federal aid. Lower-income Californians will have additional time to tap into the $5.2 billion surplus earmarked for California rental assistance. While this bill will give tenants a defense in court, they will still have to submit a declaration and may have to pay back some of their monthly rent that is past due.
Meanwhile, some counties did not wait for Governor Newson to act. For instance, the Los Angeles County Board of Supervisors voted on June 22, 2021, to extend the county’s eviction moratorium through September 30, 2021. Additionally, San Diego passed the strictest anti-eviction law in the entire state, capping rent increases and allowing evictions only if tenants possess “imminent health or safety threats.” San Diego’s draconian eviction ban was designed to help renters, but left small landlords with little recourse, making them more likely to take the property off the rental market and sell. This signals to renters that even if the state does not act fast enough, each county may proceed on its own.
If you are a renter or landlord, we recommend you speak to a local eviction specialist in your area to confirm if these measures apply to your specific circumstances.
Though courts started to make space for a barrage of unlawful detainer cases, surprisingly, many economists and industry experts do not foresee an increase in post-COVID foreclosures or the flooding of homes onto the market. They believe there will not be a flooding of cases because the equity in the property remains despite the defaulting of loans. In the case of rental properties, it may be more profitable for the landlord to cut their losses without litigation and set the renter on their way to sell as fast as possible. In that regard, many lenders are coming up with creative ways to assist borrowers.
Brokers interviewed for this article explained that while some owners might default on their loans, they may be able to forgo their mortgage payments by simply relying on the increase in their home equity. The idea is when the moratorium is lifted these owners will list the property, pay off their debt, and still have money left over. This optimistic view is a generalization. It cannot be ignored that the consequences of paying off outstanding debts with “some” money left over may not be enough to get these same owners back into the artificially inflated market with inevitably rising interest rates. Moreover, many owners are also investors who use rental income as revenue. Once the stimulus packages stop and the moratorium is lifted, many of these investors will be forced to sell or simply let the bank take the property over.
Additional governmental forbearance measures may not be the right answer to a housing bubble. Forced sales increase the volume of homes on the market, increasing supply while driving down the demand. When additional homes go onto the market and governmental assistance decelerates, we will likely see an adjustment in pricing. Possibly then, the pendulum might swing back to a buyers’ market.
Author’s Note: On June 9, 2021, the Fair Housing Finance Agency announced it will extend a national moratorium on evictions and foreclosures until January 31, 2022, on single-family homes financed by Fannie Mae or Freddie Mac.
Mortgage Rates
Property value and housing prices directly correlate with mortgage rates. Historically low-interest rates coupled with a low housing supply fuel artificially inflated the sellers’ market. The average interest rate in 2014-2015 hovered around 4% before lenders started lowering conventional loans in 2020 to as low as 2.72% for a 30 year fixed loan. Currently, certain financial agencies predict rates as high as 3.5% by the end of summer 2021 while others are predicting only a modest increase to 3.3%. Given that a post-pandemic economy is projected to recover strongly, it is no surprise that interest rates will increase over time.
Fluctuating percentage points make buying or selling a home difficult in any market. Higher rates mean higher monthly payments and the ability to qualify for an affordable loan. Interest rates have the power to slow down the momentum of a sellers’ market by narrowing the pool of potential buyers and also making homebuyers pickier. When interest rates start to increase, we will likely see home sales decrease, stay on the market longer, and more selective buyers emerge.
The opinions and comments expressed in this article are the sole opinion of the drafter and do not constitute legal advice. If you are a buyer, seller, renter, landowner, financier, borrower, or investor, each real-life matter is different and we invite you to consult with legal counsel on an individual basis. Each case is different and everyone’s individual experience depends on various factors that need to be considered and consulted upon.