About a quarter of home sales each year in Virginia occur in March, April, and May. As we are in the midst of the coronavirus storm, it is reasonable for buyers and sellers—and their REALTORS®—to have questions about the potential impact of the current situation on the economy and the real estate market.
The social, psychological, and economic impacts of the coronavirus, not necessarily the virus itself, are making a significant impact on the housing market, changing the way REALTORS® do business, and creating uncertainty among consumers.
We are still in the early stages of the response and impacts of the coronavirus. In such a fluid situation, predictions are difficult to make with a high degree of confidence. While it seems likely that we will experience an economic downturn, the specifics are hard to predict. New information is coming in each day, but so, too, are new questions and uncertainties.
Q: What do potential buyers need to know about market conditions related to the coronavirus?
A: Buyers who are in very secure jobs are actually in a good position to buy now because interest rates remain very low and other buyers may be sidelined. Those sidelined buyers include those who are taking a “wait-and-see” approach, while others are not in a position to buy a home because their income has been cut or they fear their job is at risk. A buyer may find that some sellers are more negotiable on price, knowing that there are fewer buyers out there.
While they might face less competition for homes, buyers will face other challenges. Some sellers are pulling their listings over concerns about the spread of the virus. In addition, some sellers may be apprehensive about making their homes available for in-person viewing. Even if a buyer can make an offer on a home, there could be challenges associated with finding appraisers, inspectors and other vendors to visit and examine occupied properties.
Finally, buyers need to be aware that it is possible that there will be a short-term, negative impact on prices. Therefore, a buyer who is looking to live in a home for a relatively short period of time (e.g. less than two years) should have realistic expectations about potential home value appreciation given that the coronavirus will have a dampening effect on price growth in the near-term.
Q: What do sellers need to know about market conditions related to the coronavirus?
A: Sellers will need to recognize that despite low interest rates, demand is going to be weaker. As a result, a seller may not be able to command the price that he or she anticipated going into the spring market.
Would-be sellers that have flexibility could defer selling with the hope that the market recovers quickly and demand bounces back. However, at this point, the long-term economic impacts of the coronavirus are not clear. Restrictions related to the virus could last months, with the Trump administration stating that the country could be dealing with cases through August. It is increasingly likely that the U.S. economy will head into a recession this spring (if it has not already). While Virginia can be somewhat insulated from the worst impacts of an economic downturn, there will likely be job losses throughout the Commonwealth, which could dampen demand even further.
Those who do need to sell now will need to work creatively with their REALTOR® to make sure they are marketing their home appropriately, making it possible for potential buyers to view the home, and setting realistic expectations about price.
Q: Are we heading into a recession?
A: Risks of a U.S. recession have been increasing as the effects of the coronavirus are experienced more broadly. There are several reasons why a U.S. recession is now likely in 2020. (We may find that we entered a recessionary period in March, though we won’t know until economic data are reported for the 1st quarter.) First, losses in the stock market will clearly have an impact on household wealth, which can make households feel less confident about their economic situations. Second, as more restrictions are put into place, people are spending less money. Because consumer spending supports about 70% of the U.S. economy, a slowdown in that spending will impact the overall economy. If consumer confidence retreats and spending dwindles as a result, the economy does not have many other sources of growth to fall back on, which could precipitate a new recession.
Third, businesses are increasingly making changes to deal with the impacts of the coronavirus. In some cases, companies are asking or requiring employees to work from home, hoping that there will be minimal impacts on productivity. However, for many businesses, teleworking is not an option. These businesses will have to decide how to manage during the coronavirus restrictions and interruptions to supply chains. Increasingly, more businesses are closing or laying off employees. As job losses increase, consumer spending falls even further, and the impacts extend more broadly from eating out and going to the movies, to buying a car or a home.
Q: Is the housing market in Virginia headed for a crash?
A: The short answer is probably not. While it is likely that the impacts of the coronavirus are leading the global and U.S. economies into a full-blown recession, the impacts on the housing market will be very different than what we experienced during the last recession in 2007 through 2009.
First, lending standards are much stricter now than they were back in the early 2000s when mortgage financing was easier to come by and people bought homes who may not have had the appropriate financial resources.
Second, and largely as a result of the tighter lending standards, price growth has been very steady in recent years, with prices up between two and four percent, annually. This pace of price growth is in stark contrast to the double-digit price appreciation we saw leading up to the housing market bust and Great Recession.
Third, before and during the last recession, Virginia had a surplus of homes for sale after a ramp up of new housing construction, particularly single-family home construction. We are in a very different situation now, where supply is extremely limited. In February, there was an estimated 2.6 months of supply, on average, across the Commonwealth.
Therefore, while it is likely that demand will soften in the near-term, there is little to suggest a major, long-term negative impact on Virginia’s housing market. Unless there are significant job losses in Virginia, which, right now, is not expected, many transactions that would have occurred this spring may be pushed to later in the year.
Q: Will home prices fall in Virginia?
A: In the near-term, there will likely be some slowdown in price appreciation and there may be model price drops in some markets across Virginia. A slowdown in prices results from softening demand as some would-be buyers take a “wait and see” approach and others have to delay a home purchase as a result of a disruption in income.
Home sales data are available for February, which reflect market conditions before the coronavirus was front of mind. The median sales price was up 8.3% compared to February 2019, following a 1.8% price increase in January. However, we obviously need to wait and see what March will bring.
Q: Are there certain parts of the market that could be more adversely impacted?
A: The downturn in the stock market could have an adverse effect on those households who were planning to use stock holdings to fund a down payment. It is likely that this could have a bigger impact on the top end of the market, where financial market wealth is more often used as a source of funds for luxury homes, as well as second homes and investment properties. As a result, Virginia REALTORS® could see a softening of prices of homes in the upper price segments and these homes could stay on the market longer. These impacts could be more strongly experienced by REALTORS® in some of the higher-priced markets in Northern Virginia, as well as in some of the Commonwealth’s second home markets.