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Hope On The Horizon: 4 Signs For Investors


States are beginning to ease shelter-in-place restrictions and as they do, U.S. economic activity will start lumbering back to life. It would be foolish to pretend the housing market can escape unscathed from the impact of COVID-19, but recent data shows real estate investors may have an advantage in the weeks and months ahead.

Housing Inventory At A Record Low

2020 started under a severe housing shortage. In February, Freddie Mac estimated 2.5 million additional housing units would be needed to make up the shortage. The COVID-19 pandemic has only exacerbated the problem. Housing starts were down 22.3% from February to March, according to seasonally adjusted numbers in the most recent U.S. Census Bureau and the U.S. Department of Housing and Urban Development Report. 

Additionally, new listings started strong in March (up 14% year-over-year at the beginning of the month) but then dropped as the COVID-19 pandemic took hold in the U.S., ending down 43.8% year-over-year by April 17th. Realtor.com reports that “many [sellers] don’t want potentially infected strangers walking through their homes and want to wait for the economy to improve so they can fetch top dollar.”

The pre-existing inventory shortage combined with the more recent drop in new listings and housing starts may provide real estate investors with a unique opportunity to fill the gap.

Homebuyer Demand Rising As Restrictions Lift

Home sales in March actually increased modestly year-over-year but fell from February 2020 due to the restrictions put in place to combat the spread of the coronavirus. Although experts anticipate a continued decline when April’s numbers are released, buyer demand hasn’t evaporated. In fact, recent weeks have shown encouraging signs of returning demand.

Zillow recently reported an increase in search traffic and Redfin reported an uptick in potential buyer inquiries. Additionally, data from national showing service ShowingTime indicates a strong upward trajectory in showing activity over the past two weeks following the steep decline that occurred as infection rates escalated in early April. 

Most encouraging of all is the double-digit gain in weekly mortgage applications for the week ending April 24. Although still down year-over-year, the 12% increase week-over-week indicates homebuyers may be coming back to the market. “The 10 largest states [by application volume] had increases in purchase activity, which is potentially a sign of the start of an upturn in the pandemic-delayed spring homebuying season as coronavirus lockdown restrictions slowly ease in various markets,” said Joe Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.

Adding to the incentives for buyers, mortgage rates fell to a record low to 3.43% for the week ending April 24, the lowest on record, and a full 1% lower from the same period last year. To put this into perspective, this lowers the monthly interest costs of owning a home by 23% for new buyers.

Home Values Projected To Increase In 2020

Many experts have weighed in on how the current crisis is different from the housing market crash in 2008 and what that means for home values in the future. (Spoiler Alert: it’s good news for investors who have a flip ready to put on the market.) Matthew Gardner, Windermere Real Estate Chief Economist, recently provided an excellent overview of the housing market in 2007 compared to the market today.

Generally speaking, homeowners today are less leveraged than those in 2007. They’re also sitting on more equity, boast better credit, and have a much lower payment-to-income ratio. “Coming into 2020 homeowners were in very good shape,” Gardner explains. “The bottom line is this. Are we looking at a repeat of 2007?…I just don’t see it.” 

Gardner goes on to state that although he believes home sales will be down 10-15% this year due to COVID-19, home prices will be up year-over-year by roughly 2.5%. 

Lawrence Yun, National Association of Realtors® Chief Economist shared a similar view recently. “Although the pandemic continues to be a major disruption in regards to the timing of home sales, home prices have been holding up well,” Yun said. “In fact, due to the ongoing housing shortage, home prices are likely to squeeze out a gain in 2020 to a new record high.”

Stir-Crazy Buyers Are Hungry For What Investors Are Offering

The long-term changes in consumer behavior due to the coronavirus remain to be seen. Yet, shifts in homebuyer preferences are already coming to light. During the first two weeks of April, Realtor.com conducted a survey to learn how sheltering-in-place has changed home shoppers’ preferences for their next home.

According to the survey, renters and owners were on the same page about wanting a larger house for their next home. And both groups ranked an updated kitchen near the top. Renters, in particular, are looking for additional space from neighbors, along with more and better outdoor space.

This bodes well for both flippers and landlords. First-time homebuyers who may need to put plans to purchase a home on hold due to economic uncertainty may choose to flee cramped apartments for roomier single-family rentals. 

For consumers who have more economic stability and are ready to purchase, a freshly rehabbed property with a standout kitchen will likely land at the top of their list. Another factor that could give investors’ properties an advantage is that a vacant home poses a lower risk of exposure to the coronavirus than an occupied one, which could help ease the fears of skittish home shoppers.

The Bottom Line

Inventory remains incredibly constrained. Meanwhile, buyer demand is returning. Interest rates are at an all-time low. And home values are expected to rise. Although much remains uncertain, there is plenty of welcome news that shows we may have cause for optimism sooner than we’d expected.

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