Many observers of the real estate market are wondering why real estate prices have not declined due to the COVID-19 crisis underlying the economy. Although there has been vast volatility in the broader markets (equities, bonds, gold, bitcoin, foreign exchange, etc), real estate has remained resilient.
In our view, there are three primary reasons for this:
- Lower interest rates – in March 2020, to combat the anticipated recession brought on by COVID-19, the Federal reserve lowered the target Fed funds rate by a full point to 0-0.25%, in effect, lowering mortgage rates by a similar amount. Lower interest rates make real estate more attractive and a better investment.
- Few distressed sellers – although the US faces a high unemployment rate, upwards of 20%, that has largely not translated in real estate owners ability to pay their mortgages. Here’s why:
- Due to the generous unemployment benefits included in the Government’s CARES act, the average person that lost their job due to the COVID-19 shutdown actually makes more money on unemployment than what they made when they were employed – a staggering fact.
- The Paycheck Protection Program (“PPP”) has allowed businesses that would have normally closed due to the shutdown to continue to pay their employees – on average for nearly three months.
- The government has mandated that borrowers can still get up to two 6 month payment extensions on any mortgage that is Fannie Mae or Freddie Mac guaranteed – that’s about two-thirds of all mortgages.
- Low housing inventory – as of February 2020, before the pandemic even hit, the real estate market faced the lowest inventory since 2012. Now, with many selling taking their homes off the market (for social distancing reasons), housing inventory continues to slip. Anecdotally, we are even seeing bidding wars for properties…in the middle of a pandemic. Truly, unexpected!
Unless there are major changes to any of the above facts, we should continue to see strong pricing support underlying the real estate market. While this may seem discouraging to new real estate investors waiting on the sidelines to buy-in cheap, solace can be taken in this simple fact: real estate prices are resilient, even during a one-in-one hundred year pandemic event. While none of us know what the future holds, it’s fair to say that an economic scenario that includes massive real estate price depreciation has likely been taken off the table.