The Impact of Covid-19 on Home Values
May 1, 2020
In the last couple of posts, we’ve shared what kind of economic recovery we can expect, as well as looking at how long it might take for the economy to recover. Today we focus down and look at the impact of Covid-19 on home values.
One of the challenges facing the housing industry is determining the full extent of the economic impact on families and, consequently, on home values. In previous posts on home value, we explained the factors that go into determining the value of a home. Not to mention the fact that there are some critical items to be considered when estimating home values.
Supply and Demand
The price of any item and especially homes, is determined by supply and demand, that is, how many homes are available in relation to the number of consumers who want to buy.
In residential real estate, the measurements we use to decipher that ratio is called months supply of inventory. In a normal market, we would expect to have 6-7 months of inventory. A buyers market exists when the inventory supples are over seven months, which puts downward pressure on prices. Inventory levels below six months are considered seller’s markets, which put upward pressure on prices.
Going into March of 2020, the supply of homes was at three months-a strong seller’s market. The National Association of Realtors released a monthly report revealing we still have 3.4 months of inventory. The impact of Covid-19 slowed homes sales, as expected, but showed no signs of slowing rising prices.
While sales have declined, home prices are still solidly strong. The median existing-home price2 for all housing types in March was $280,600, up 8.0% from March 2019 ($259,700), as prices increased in every region. March's national price increase marks 97 straight months of year-over-year gains.
What Say the Experts?
Here are the reports from some other residential experts:
Supported by our analysis of home price dynamics through cycles and other periods of economic and housing disruption, we expect home price appreciation to decelerate from current levels in 2020, though easily remain in positive territory year over year given the beneficial factors of record-low inventories & a historically-low interest rate environment.
The fiscal stimulus provided by the CARES Act will mute the impact that the economic shock has on house prices. Additionally, forbearance and foreclosure mitigation programs will limit the fire sale contagion effect on house prices. We forecast house prices to fall 0.5 percentage points over the next four quarters. Two forces prevent a collapse in house prices. First, as we indicated in our earlier research report, U.S. housing markets face a large supply deficit. Second, population growth and pent up household formations provide a tailwind to housing demand. Price growth accelerates back towards a long-run trend of between 2 and 3% per year.
The housing supply remains at historically low levels, so house price growth is likely to slow, but it's unlikely to go negative.
What's That Mean?
Though Americans may slow down the rate at which they are buying homes, there are no indicators that prices will take a dip. Once the economy accelerates out of 2020, the volume of sales will also grow.