housing market in 2020

What will happen to the housing market if we have a second wave of outbreak? Quite a few states are seeing an uptick in COVID-19 cases right now, so this is an important question to ask. This isn’t about politics or fear, but having conversation.

From V to W? The market has seen a “V” shape so far where we had a decline when the pandemic began and then we rebounded. Today I interview economist Ralph McLaughlin to talk about his concept of a Flying W. It sort of takes the “V” that we’ve already seen and talks about why we might see another “V”.

Market update: Here’s my latest market update where I unpack glowing stats from this past week and some things to keep in mind if we do see another outbreak. Watch below (or here).

Ryan: What is The Flying W?

Ralph: The “Flying W” is generally the shape of the housing market recovery that we’re forecasting at Haus, which essentially is a wavy one. You can think of it as really two “Vs” next to each other, where the initial drop in activity due to the pandemic is sharp and severe, followed by a rebound to near pre-pandemic levels, and then the process repeats itself until we’ve recovered sometime next year. We’re thinking the process will repeat itself for a second time for three reasons. First, we think the initial rebound is simply due to pent-up demand for home buying that would have otherwise occurred in March, April, and May but will simply be pushed to June, July, and August. But after that, we’re not expecting new demand to replace it at comparable levels, which will lead to another drop in activity. Second, and I think we’re seeing this already, is that the virus will make a comeback, which will lead to less demand for homebuying in the fall. Third, there’s a possibility that we’ll see a broader impact on housing demand (including rentals) if the federal unemployment insurance bonus runs out at the end of July.

Ryan: What sort of stats would you recommend following to know if a “W” shape was beginning to happen?

Ralph: The important thing to note here is that some indicators are likely to follow a W, while others might follow an additional path. We’re expecting employment growth, home sales, price growth, and housing starts to follow a “W’ pattern, whereas we’re forecasting refinance activity to be more waterfall shaped. Other indicators are likely to buck the trend. For example, if renters are hit harder than homeowners, then we could actually see an uptick in the homeownership rate.

Ryan: Do you have any advice for buyers and sellers as they consider a possible second wave of coronavirus?

Ralph: Sellers shouldn’t be too worried at this point. It appears in the aggregate, sellers freaked out more than buyers during the pandemic. We saw large decreases in inventory across the country. And though demand certainly fell, it didn’t fall as far as supply. So the result has been a surprisingly robust market in many markets across the country. I recently sold my home in Virginia and was pleasantly surprised to have multiple offers, so buyers shouldn’t be expecting to get massive, if any, discounts like they could 10 years ago.

Ryan: Any tips for the real estate community?

Ralph: Utilize technology. We’ve come a very long way over the past decade in how people search for, tour, finance, and close on homes. Those who can utilize technology will have a competitive advantage during a downturn and thus will be more resilient. Buyers are becoming savvier with narrowing down their search list using online search portals, agents are becoming more savvy with how they use tools to virtually show homes and hold open houses, lenders are findings ways to streamline document sharing and signing, and title companies utilize platforms that make closing more transparent and efficient. The more the real estate community can utilize these technologies, the more resilient it will be.

Ryan: Thanks Ralph. I appreciate your time today.

Closing Thoughts: I’m really careful about discussing the future, but today I wanted to talk with Ralph because I think we need to think through what might happen to the market with a second outbreak and plan ahead. In my mind the two big issues that could influence the market include people’s perception of safety and governmental regulations. If we go on lockdown again, for instance, that could be a huge factor in slowing down the real estate market. Would it be exactly the same thing we saw in late March? Nobody knows. For now though it’s fascinating to consider whether our “V” shape could turn into a “W”. Let’s keep watching…

Manage your mental health: One last note. I realize this is a stressful time for many (including myself), so my hope is that you would have a deep sense of peace no matter what happens. And if you’re getting triggered by so much virus talk, maybe tune out of social media. My sense is having peace is not going to happen by accident so we all need to figure out how to cultivate that. Know what I’m saying?

Thanks for being here.

Questions: How do you think a second outbreak might affect the housing market? Do you think we’re going to go on lockdown again? I’d love to hear your take.

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What’s the real estate market going to do in 2020? Let’s talk about some of the bigger emerging trends. Scroll quickly or digest slowly. Anything to add?

Class I’m teaching on Jan 16th: I’m doing a big market update at SAR from 9-10:30am. We’ll talk through where the market is at, tips for talking to clients, and ideas for where to focus business. I’d love to see you there. Sign up here.

TRENDS TO WATCH IN 2020:

Affordability: Buyers are struggling to afford higher prices. Despite positive economic news lately the truth is home price growth has outpaced wage growth and rents have also risen substantially. This means many buyers and renters are having a difficult time with higher prices.

Blue is the color of the year: This year the Pantone color of the year is Classic Blue. Does this mean we’ll see more blue? Maybe. Maybe not. In recent years we’ve already been seeing blue in kitchens especially. No matter what, when looking through home magazines there are many vibrant colors instead of just gray and white.

Sliding sales volume: A byproduct of shrinking affordability is a smaller pool of buyers able to handle higher home prices. This is something to watch and even more important than prices in my opinion. Often we fixate on what prices are doing, but the number of sales happening is the best indicator of the temperature of the market. Are buyers putting their foot on the gas or brakes? Show me the number of sales and I’ll let you know.

Addicted to low rates: We’ve had eight years of historically low rates and we’re now feeling the effects. Prices have risen dramatically, people are staying in their homes longer, and the market feels hyper-sensitive to rate changes. Thus what happens with mortgage rates this year will play a huge role in how the market feels and unfolds. Check out this mortgage rate table from Len Kiefer below (or here). Can you see why 2018 felt so dull? I know it seems crazy that buyers would freak over rates just above 4.5%, but that’s where we’re at (and climbing rates lessens affordability).

Ending single family zoning: There’s a movement to do away with single family zoning in order to help create more housing. In 2019 we saw Minneapolis do this by allowing up to three units to be built on a single family lot, and this is definitely something to watch in many markets across the country. By the way, if you own land, could it become more valuable if zoning changed?

Tech company invasion: It almost feels like there’s a tech bubble because so many companies are trying to get a piece of the real estate pie. On one hand some start-ups are going to fail because their algorithms are designed for labs rather than a relationship-centric real estate market. On the other hand some tech companies are poised to gain market share this year. In Sacramento Opendoor looks to have sold about 1% of transactions last year and they currently own 90 homes. I’m guessing Zillow is aiming for 1-2% of market share this year. Will they be successful? I’ll let you know next year… In all of this it’s good to remember the traditional model represents the vast bulk of the housing market despite the massive attention these companies are getting. Yet we can’t ignore this trend because it’s bound to spur the traditional model to become more efficient.

Overpricing will still be an issue: Price growth has clearly slowed, but sellers still think it’s super hot. This is a glaring issue because sellers tend to think they’re going to get ten offers at any price they choose from very desperate buyers longing for their home. It’s like sellers have shown up at the end of a movie and they have no idea what the movie is about (but they think they do). My advice? Price for the dynamics of the current market rather than a hot market from yesteryear.

Buyers grow even pickier: In 2019 there was a greater sense of hesitancy about the market. Lots of buyers felt leery. Am I buying at the top? Am I going to get stuck if the market changes? What does the future hold? These questions aren’t easy to answer of course until the future actually happens (sorry, but it’s true). The reality is uncertainty is bound to cause buyers to become even more discerning about condition, location, paying the right price and waiting for the right house.

Staying put instead of moving: We have a market of homebodies where nobody is moving. Okay, that’s an overstatement. It was reported recently that homeowners are staying put an average of thirteen years compared to just eight years a decade ago. There’s simply less incentive to sell in light of low mortgage rates and higher prices. Why move if you’re sitting pretty? This of course is one reason why we’re not seeing as many listings.

Checking out of California: Despite some residents staying put, this year there will be lots of Californians moving to all the usual places like Texas, Nevada, Arizona, Oregon, Idaho, etc… For the real estate community, I highly suggest you consider who has incentive to move this year. Remember, a California pension goes a long way in a lower-priced state. Check out a deep piece by CalMatters and you can dig around the U.S. Census Bureau site all day to try to find some data that might be insightful for your business. On a related note, let’s keep an eye on areas plagued with rising fire insurance too as that can unfortunately force migration.

More 1031 Exchanges: We’ll likely see more 1031 Exchanges this year as investors move their money. In my experience there are more in an up market than a down market, and we’re still going up, so be ready. I’ve seen quite a few Bay Area investors park their money in Sacramento, and I’ve seen some Sacramento investors move their money to lower-priced areas. That’s the dream, right? Cash out when prices are higher and buy something better elsewhere.

Consolidation in real estate: Having lower sales volume can be painful for both mortgage companies and real estate offices. Thus we’re likely to see some banks continue to lay people off, mortgage companies will join forces, and some real estate brands and brokerages will need to get creative about staying afloat and trimming the fat with less purchases flowing.

Election year hype: “It’s an election year, so it’s going to be a strong year.” That’s the sentiment we often hear in the real estate community, but an election year isn’t the silver bullet to alter the bigger trend the market is already experiencing. I have a deep blog post coming soon about this.

Flipping seminars: There will be no shortage of celebrity flipping seminars this year to teach the “secrets” of getting rich in real estate.

The narrative of Boomers & Millennials: Be on the lookout for Boomers who need to downsize and Millennials trying to get into the market. We’re bound to see lots of generational conversation this year as Boomers age and Millennials “come to age” so to speak to get into the market. One looming issue that’s been getting more press lately is there is an enormous Boomer population whereas GenX was a smaller generation. Thus at some point it makes us wonder who is going to buy the homes of aging Boomers in years to come. This is something to watch more thoroughly over the next decade. And to make a safe prediction, we’re definitely going to keep seeing “Okay, Boomer” references in articles.

Well, that’s what’s on my mind. I could go on and on, especially about things like fire insurance woes, PG&E, Prop 13 reform, rent control, cannabis laws, etc… But at some point I have to stop.

By the way, click to see 2019 market recap images for a few local counties.