Exploring COVID-19's Impact on the Housing MarketWhy you should be very cautious buying a home right now
By: Brooks Latta (BLatta12)
Photo by Todd Kent on Unsplash
A Look at the Current MarketThe real estate market is hotter than hot. People that own homes are having realtors stop by their front doors and ask if they willing to sell their homes. Realtors are pleading on Facebook to contact them if you are even slightly considering selling a home.
Realtors do not have enough inventory to meet the demand of buyers.
Real estate buyers are offering insane amounts over the asking price, as much as 20% to 30%, and still not getting the house. It is truly a seller’s market.
So the question remains, what is COVID-19’s impact on the housing market and why the notorious surge?
When examining this situation from afar, many people at first thought would predict there would be a hesitation with the market because of the uncertainties brought on by COVID-19. Many would envision people playing it safe with their money, have fear of catching the virus or even finding help to move, etc., and stay in their current place of residence.
However, that is not the case or the real estate market we are living in.
The simple fact is there is a shortage of new houses. At the height of the pandemic, the lumber factories all shut down. Therefore, you could not get lumber. And when you went to obtain the materials required to build a house there was a feeding frenzy, like piranhas trying to eat a piece of flesh.
According to NBC News, lumber hit an all-time high of $1,686 per thousand board feet in May of 2021, surging by 406 percent from the $333 it was trading at the same time the previous year.
In addition to lumber, there was also a shortage of other parts and components required to build a house. The entire supply chain situation issue compounded itself.
Without an inventory, the new housing section of the market slowed to near nothing. There was a gap of 6 to 8 months of production in supplies, labor, and subsequently new houses.
Today, people looking for a house are faced with the realization that there are very few houses available so they must look at used houses.
If 50% of people were looking at new houses and 50% looking at used houses. Now in the tail end of the COVID-19 pandemic, you could have twice the number of people looking at half the number of houses, all of them used houses.
People are and have been buying houses during the pandemic. Some were even purchasing site unseen with only viewing in video conferencing applications such as Microsoft Teams or Zoom. So the problem with the market is not a huge increase in the number of buyers it’s that there’s a decrease in available inventory.
One other factor to consider in all this is the exodus of people in states such as California and New York. Some people are done with overreaching Government control and the sky-high housing prices. This adds a small number of buyers with big bucks to spend in towns where there is already a decrease in supply.
In the current real estate market, the buyers go crazy, the sellers go crazy, and the buyers go even crazier.
Sellers are happy to let a house go 20% and 30% higher than they were even asking, equating to $50k and $100k over the asking price in the average U.S. market.
This is happening all over America, in small and large markets.
The FalloutThis market will subside. There will be a hangover. The important thing to remember is you want a professional on your side if buying a home right now. You do not want to overpay and be left holding the bag on something that’s not worth the price you paid in 2021.
There are virtually no deals to be had in the current market.
A Historical ExampleThe 1970s were a very close example of what’s going on in present-day America. Inflation was the biggest problem that took place then and is ramping up today.
If gas pump prices double and housing continues to go up enough, inflation will become a major problem where America sees record increases of 15% to 20% inflation per year.
According to CNBC, the April 2021 consumer price index, which measures a basket of goods as well as energy and housing costs, rose 4.2% from the year before. This was the largest increase since September 2008 and the fastest rate of increase since 1981, sparking inflation fears.
In the most prominent period in which America faced high inflation, many people credit President Ronald Reagan’s economic policies with rescuing America out of the economic mess left by President Jimmy Carter. Reagan removed regulations and it opened up the market.
As the market opens up, oversupply becomes a factor and prices stabilize, or even subside.
In the 1980s under President Carter, interest rates on houses were 17% to 18%. Very few families would buy a house with interest rates that high because it was equivalent to today’s credit card rates. People paused and stayed in their existing residence. So when rates came down to 14%, cars were lined up around the block of new subdivisions with people ready to buy a house.
It was very much similar to the post-COVID-19 period of today where people were going crazy to purchase a house.
If mortgage interest rates go up from 3% to 6% due to inflation, people will again stop buying houses. The cycle is inevitable.
Photo by Aaron Huber on Unsplash
Final WordIn closing, the reality is you need a real estate professional in your corner when buying a house in today’s market.
A mistake in the purchase price and you could be off by more than $100,000 than what you could have paid in a normal market. You do not want to be on the wrong side of this pandemic.
Being neutral is probably the best and safest play. It would be much better to sit back and let other buyers overspend. Rent for now or stay in your current home. When things settle, find a home and avoid a financial mess.