The nation’s real estate markets haven’t seen much impact from the Coronavirus pandemic yet. People are still buying homes and values in most U.S. cities are still climbing, however, as uncertainty weighs on the minds of many homebuyers, they may be less likely to make major purchases until the economy stabilizes.
Reports say that home sales in the U.S. surged in January 2020, hitting a 12-year high. CoreLogic, a property data company, reported on March 3rd that home prices in the U.S. rose by 4% from January 2019 to January 2020. The company’s HPI Forecast expects home prices to rise by 5.4% from January 2020 to January 2021.
Over the past several years, home supply has not been keeping pace with demand. When demand goes up, home values go up. A new study by Freddie Mac puts the housing shortage at a 3.3 million-unit deficit nationwide. The report estimates that 29 states have a housing supply deficit. The states with the highest deficits are Oregon, California, Minnesota, Florida, Colorado and Texas.
With the Coronavirus taking its toll on the population over the next few months, it’s likely that demand may wane until the pandemic has ended. When that occurs, demand for housing should pick up where it left off. Freddie Mac’s chief economist, Sam Khater, thinks we’re “in the midst of a demographic tailwind” which is expected to keep home values strong well into the next decade as millennials continue to age.
Another factor that may continue to drive demand for home sales is mortgage interest rates. As the stock market reels, investors take their money out of the stock market and put their cash into safer U.S. Treasury bonds. When bonds are strong, mortgage rates typically go down.
The Federal Reserve recently cut the Fed Funds rate by 50 basis points and they may be forced to cur raters again. Lower Fed Funds rates mean lower mortgage rates. Lower mortgage rates mean more buyers qualify to purchase homes which continues to drive home values higher.
This same supply-demand dynamic may not hold true for the luxury home market. The luxury real estate market is made up of wealthy buyers who invest in the stock market. When the market is down, there is less demand to purchase luxury homes. In addition, the Chinese make up a significant portion of luxury home buyer market.
Tightened regulations in China to control the outflow of cash from the country, due to trade wars with the U.S. and the Coronavirus halting travel to the U.S., have caused Chinese investors to pull back on purchasing luxury homes. Don’t expect luxury home values to climb as fast as more affordable housing.
Overall, expect home sales to flatten over the next few months while the U.S. works its way through the Coronavirus pandemic. Once that is over, home values to continue to climb unabated into the foreseeable future.