The coronavirus from China has wreaked havoc on the American real estate market. Housing was considered an essential service, so you could pay the rent and have the landlord repair your hot water heater. However, real estate transactions slowed to a crawl. Potential home buyers often couldn’t tour properties in person, while others withdrew from the market because their jobs were in jeopardy. There was a brief partial reopening in June and July before things started to close up again. Yet we are starting to see the widespread impact of COVID-19 on the American housing market. What should we expect from real estate in the future?
A Cooling of the Hottest Real Estate Markets
Second-quarter data for over-heated real estate markets like New York City and San Francisco are in. Home prices have plateaued in New York City, rising just three percent year over year while overall sales are down 25 percent. Rental rates in New York City have fallen during the summer of 2020. An apartment that would have commanded 2800 dollars a month is now advertised for 2500 a month.
Prices for luxury real estate in NYC have crashed. This is partially due to the millionaire tax that Andrew Cuomo put into place. However, it is also due to the massive relocation of the upper class in New York City. These were the people who could relocate to second homes in the Hamptons or rent a large home in upstate New York for a few months. Because they are overwhelmingly knowledgeable workers able to work remotely, they’re starting to put down roots in these areas. That’s why private schools in New York that used to have waiting lists are starting to offer discounts.
Something similar has happened in San Francisco. The price of the average home is virtually unchanged, and home prices are expected to fall 3 percent in 2021. Yet home prices have fallen dramatically in the most expensive areas. For example, Menlo and Palo Alto single-family homes saw home prices fall ten percent or more. This is because Big Tech companies gave their employees the ability to work from home, and many are choosing to relocate to cheaper areas. The average rent for a one-bedroom apartment fell from 3,700 dollars a month to 3,400 dollars a month year over year. For comparison, rents had been rising several percent a year for decades. There are areas seeing price increases. For example, Oakland home prices went up five percent, but that’s one of the cheapest areas in the region.
Big Tech firms responded by saying they’d adjust pay rates to reflect the cost of living where their workers choose to go. This allows them to lower their labor costs in the long run.
The Growth of the Suburbs
Urban cities were already losing their allure due to the high cost of living. Throw in skyrocketing crime rates and fear of disease, and many people choose to move. They aren’t fleeing to rural areas. They’re seeking the next best thing – a refuge in suburbia. Suburban homes are cheaper than condos and apartments in the city, but you’re close to amenities like restaurants and doctor’s offices. We’ve seen this in a number of expensive metro areas. Many people fleeing New York City moved to Staten Island, not another state. It is easier to move short distances than make a long-distance move, and people retain the ability to visit family or employers they left behind. If the Antifa / BLM riots continue, expect many more people to flee the city because their employers left.
The Evolving Real Estate Industry
Mortgage firms saw a drop in the number of new mortgage applications, but mortgage refinancing requests have skyrocketed. Real estate agents are the ones facing a greater challenge. Technology is only a partial answer. Virtual tours have become commonplace. These may involve virtual reality tours of the house created by stitching hundreds of photos together into a 3D model, or the real estate may live-stream themselves walking through the house while answering questions from potential buyers. In some cases, digitally controlled lockboxes allow the potential buyers or a home inspector to enter the property but only when no one else is present. The tools have been in place to allow people to get approved for a mortgage digitally for years. Now it has become routine because no one is able to meet in person to sign the paperwork.
Summary
The coronavirus pandemic and government-mandated shutdown slowed down the American real estate market. It is causing likely long-term shifts in residence and consumer behavior.
