Real Estate Investing Outlook
What’s the industry look like for the fourth quarter of 2020 and beyond?
Heading into the fourth quarter of 2020 is the perfect time to evaluate what impact, if any, the pandemic has had on the real estate industry as well as predict what investors should be prepared for as this tumultuous year comes to a close.
Is the Housing Market Recovering?
Let’s get right to the question that so many in the real estate professionals are wondering about: Has the housing market recovered from the coronavirus?
According to Realtor.com, “the Realtor.com Housing Market Recovery Index reached 103.7 nationwide for the week ending July 25, posting a 2.7 point increase over last week and bringing the index 3.7 points above the pre-COVID baseline.”
So, in short, yes. Real estate activity in the U.S. has increased throughout the summer, with buyers and sellers hitting their stride in July and August as they began to recover from any disruptions the pandemic caused earlier in the year. In fact, growth in sales, demand and prices have moved well above 2019 levels.
Buyers are now ready to take advantage of historically low mortgage rates, which in turn has given sellers confidence to list again, usually at record prices, due to the lack of supply that existed long before the pandemic.
According to an Auction.com analysis of weekly MLS data conducted in early August, “home prices have increased an average of 3% compared to a year ago in the nine weeks since the pandemic and national emergency declarations.” Although home prices may have dipped in late April, they quickly rebounded, with no long-lasting harm done.
Across the board, key housing indicators are showing that the market has recovered and will continue on a positive trend. However, real estate professionals should keep a close eye on the market heading into the fall as a looming second wave of COVID-19 could easily affect this rebound. This remains the biggest concern when predicting what the end of 2020 and first quarter 2021 will look like.
Will Supply Rebound?
Although sellers are reentering the market, they are doing so cautiously, and their comeback has not created a significant increase in housing supply. A Realtor.com national housing report from July showed that “national inventory declined by 32.6% year-over-year, and inventory in large markets decreased by 34.8%.”
As there was already a shortage pre-COVID, it is not surprising that supply has not rebounded; however, this continued lack of housing only exacerbates investor concerns over overinflated housing prices and lack of affordability in the market.
Although some investors have forged ahead despite market challenges, with some buying up more properties than ever before, many are waiting. The biggest question mark right now is whether an abundance of distressed inventory will flood the market once federal forbearance programs and foreclosure moratoriums end and give investors a larger buying opportunity.
Many experts believe this will absolutely be the case.
In a U.S. Foreclosure Market Report that ATTOM Data Solutions released in July, Rick Sharga, ATTOM’s executive vice president, said, “It’s inevitable that there will be a significant increase in foreclosures once these moratoria have expired, although it’s unlikely that we’ll see default rates reach the levels we saw during the Great Recession.”
Sharga attributes this to the fact that current and projected market factors, including record levels of homeowner equity and high demand, will make it easier for distressed owners to sell their property as opposed to losing it in foreclosure. So, while it may not be a question of if an increase in inventory will happen, investors are still left wondering exactly when it will happen.
How Will Commercial Real Estate Fare?
One area of the market hit particularly hard by the pandemic is commercial real estate. Investors retreated from this space around mid-March and have yet to return.
According to data from CoStar Group, a commercial real estate analytics group, “transaction volumes for commercial property remain severely depressed and changes in pricing are moving slower than expected” with a predicted 65% to 70% decline year-over-year.
The biggest obstacle that seems to be standing in the way of a commercial real estate rebound is differing opinions on prices between buyers and sellers. Commercial real estate price growth, particularly in retail and multifamily, was already showing signs of deceleration before the pandemic. With the coronavirus hitting retail extremely hard, it remains the most susceptible to further declines in prices. Multifamily is also at risk due to uncertainty as to how it will fare once government assistance for renters runs out. At this point, investors continue to take a wait-and-see approach, causing the general outlook for commercial real estate to remain much less optimistic than other parts of the market.
Predictions for 2021
Much uncertainty still exists about the coronavirus pandemic and how it will continue to affect the U.S. housing market. But that has not stopped experts from weighing in on what 2021 will look like.
Many economists believe 2021 will be the year we finally see a drop in home prices, mainly because the federal government lacks a long-term plan to extend many of the policies that were implemented in 2020 to keep the housing market afloat. However, these predictions continue to trend in a more positive direction as we get further into 2020. The initial doom-and-gloom that was forecast continues to lift.
For example, Corelogic’s Home Price insights Forecast from May predicted a “6.6% year-over-year home price decline through May 2021.” Just a month later, Corelogic revised its forecast, predicting only a 1% year-over-year decline in home prices through June 2021, with 33 states showing decreases. Many economists remain optimistic, predicting that if the market experiences overall declines in housing prices at the beginning of 2021, by the end of next year, it will rebound and experience strong year-over-year growth. At this point, only time will tell. But one thing is certain: The U.S. housing market is resilient and should continue to hold strong despite the challenges and remaining impacts of the national pandemic.
