COVID-19 has impacted the economy across the board. The economic data prior to the Coronavirus was pumping on all cylinders. Consumer confidence, consumption, unemployment, housing, stocks, leading economic indicators, everything was pointing to a phenomenal 2020. After the virus broke, every chart was impacted severely. Housing was no exception.
Experts have been debating what the economic recovery will look like. Initially, some experts were calling for a quick rebound, a “V-Shaped” bounce. That is when the economy rises nearly as fast as it falls. Yet, with more time to reflect on all the data, most experts now agree that it will be a “U-Shaped” recovery, one that after hitting a bottom will slowly but surely turn upward. The best analogy is a dimmer switch. As the dial is slowly turned, the economy will continue to accelerate until one day it is pumping on all cylinders again.
Housing is proving that it is an exception and is currently experiencing a “V-Shaped” recovery with demand soaring 38% in the past two weeks. How can that be? The sleeping giant has awakened. Even though life as everybody knows it has been turned upside down and California has only moved to “Phase 2,” record low interest rates are instigating demand. Dawning masks and gloves, buyers are viewing homes again and making offers.
Prior to the “stay at home” order in mid-March, housing was a sizzling hot Seller’s Market with extraordinarily little inventory and unbelievable demand. It was the hottest start to a Spring Market since 2013, a spring to remember for Socal housing. Low mortgage rates, averaging 3.75%, was stoking the fires of demand. When the virus hit, demand plunged, and the market slowed.
Now that it has been a couple of months, flattening the Coronavirus curve has been successful so far. Slowly but surely more of the economy is coming back online. As a result, eager buyers who had been sitting on the fence waiting to purchase are jumping back in and ready to take advantage of record low mortgage rates at 3.25%.
In the past couple of weeks, demand (the last 30-days of pending sales) jumped 30%. It was last at this level in mid-February. Typically, during this time of the year demand has already peaked and it does not change much at all. Not this year. Demand is in recovery mode and the sharp increase indicates that it is “V-Shaped.
While some thought the housing market would take a major hit because of the Coronavirus, that could not be further from the truth. The low mortgage rate environment is a catalyst that has reignited demand. Despite furloughs and unimaginable unemployment, local real estate is revving its massive engine once again. Many are wondering where the demand is coming from. A lot of people are still gainfully employed, willing, and able to purchase. With rates at a record low, home affordability has dramatically improved from earlier in the year. The market was hot back then and it is no wonder that it is heating up again.
The active inventory dropped during this time of the year. The inventory remains at lows last seen in 2013. Surging demand and a dropping supply resulted in the Expected Market Time (the time between hammering in the FOR-SALE sign and opening escrow) tumbling to a hot Seller’s Market (less than 60 days). That is a market where sellers get to call more of the shots and values are rising. Last year at this time, the Expected Market Time was way slower than today.
Recent weeks have proven that the housing market is extremely resilient and a bright spot in the economy. Buyers can expect housing to improve from here as demand continues to rebound. This is not the Great Recession when real estate was a house of cards ready to collapse. Back then it was a bubble fueled by mass speculation, subprime lending, pick-a-payment plans, a wave of cash out refinancing, zero down payments, and fraudulent lending practices. Mortgage rates were at 6.35%.
That was then, this is now. The current housing stock was built on tight lending requirements. Buyers have had to prove that they could afford the monthly mortgage payment. There were very few cash out refinances, large down payments are the norm, and there is plenty of nested equity.
This time around housing is built on a strong foundation. It may prove to be a catalyst to an eventual economic recovery.
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