The nation and the world suffered a swift shockwave in early 2020 as a result of the pandemic, still reverberating through the economy. The impact on the real estate market was slow to unfold, defied most predictions, and continues a seldom-seen volatility.
From 2012 – 2019 – we experienced a time of rising wages and the cost of living remained low – real estate markets across the country exhibited the historically sustainable and predictable appreciation resulting from a balance between supply and demand, low mortgage interest rates, and robust equities market.
The spread of the Covid-19 virus upended daily life as workers and students were sent home. Distance work and school became an opportunity to assess and examine how a home met the needs of this new lifestyle. Extra space was needed for the home office and classroom, while congested neighborhoods and apartment living lost their appeal. Larger homes in suburban locations – previously waning in desirability– experienced enhanced popularity.
The fear and restrictions surrounding the pandemic limited the number of sellers prepared to open their homes to the market, constricting the inventory of properties for sale, while at the same time prospective buyers were eager to purchase and the government was pumping liquidity into the economy. Home prices in the destination markets climbed higher due to frenzied competition among buyers. The effect extended into rural and coastal areas traditionally seen as second-home and vacation markets. These areas, normally see only laconic activity, but as the work-from-home economy continued, people took the opportunity to relocate from areas where employment was concentrated to further out and more affordable destinations. The increasing demand for a still-limited inventory of homes for sale was further heightened by extremely low interest rates, and institutional investors flush with cash seeking portfolios of both long- and short-term rental properties. With the supply limitations coupled with the lose fiscal and monetary policy of the government during the pandemic, is it any surprise inflation raised its ugly head?
To stem off inflation spiking over 8%, the government swiftly reversed course with rate hikes unseen in modern history, causing mortgage rates to climb from 3% to over 6% in just a few months. As mortgage payments climb – even though housing inventory remains tight – home price appreciation has shown signs of slowing and even retraction in many markets. This trend is likely to continue as we are already noticing market times on currently listed homes increasing along with more supply of homes for sale.
Coming out of the pandemic housing experienced unprecedented appreciation catapulted by unusual situations changing the normal supply and demand on housing. Though the appreciation did illustrate signs of a bubble, it is not our impression that we will have a burst giving back the 15%+ annual appreciation in housing. That said, it is clear the market is normalizing and not unreasonable to expect a declining market which will give back 5%-12% of those gains in the next couple years as we fight inflation.