Like many aspects of our lives, the business of residential real estate has been upended by the events of the last month. It is a scary time. We are living through events few of us have anticipated and I think we can safely say no one has lived through before. Most folks are focused on staying healthy and safe, keeping their jobs (or paying bills without one) and other very real and important concerns.
As far as the financial impact of this virus, I am the type not to look at my 401k during times like this and I extend that to Real Estate as well when thinking about the value of my home. Most of us are not really thinking of selling soon. I still believe over the long-haul real estate in Los Angeles will continue to provide returns for those who own property, just like my 401k will eventually see the gains it had achieved back in early February.
But not everyone has the luxury of waiting this thing out in terms of addressing their housing needs. I recently had a first buyer consultation with a couple who were planning to buy this spring and want to continue the process despite the challenges (we had a Zoom meeting and it was quite easy to do). Both feel safe with their jobs and the money they have for the down payment is relatively stable. In fact, it is being isolated at home in their small apartment that got them motivated to get the process started sooner rather than later. There may be sellers as well who are under a time constraint and want to sell now rather than wait out the virus.
So how is the market performing? How is real estate being bought and sold during social distancing measures?
One nice thing about residential real estate is that it is already very much online. You can continue to view property listings and get all the information you need about a property via all the usual tools. There are no more open houses for now but with virtual tours and virtual open houses, looking online is now easier and more effective than ever.
The City of Los Angeles has asked agents not to show property at all, although LA County & California state guidelines are less strict; with the agent and buyer allowed to enter a home alone to view.
Appraisers are doing more drive buy evaluations and inspectors are doing inspections but consulting with buyers over Facetime. Traveling notaries are still doing their signings, but with strict social distancing measures.
There are also new disclosures to sign in regards to viewing a property that are designed to advise buyers on the risks of getting COVID-19 and protect sellers from liability. There is also now a Corona Virus addendum to the standard purchase agreement. This is designed to allow the parties to take action to delay or cancel the agreement based upon Unforeseen Coronavirus Circumstances arising.
The big question on most people’s minds (both buyers and sellers) is how will this impact home values. And the answer to that question is not clear. Truthfully the future never is. The “are we going to see a price reduction?” question comes up all the time, even without a national health crisis. Anecdotally, there are a few agents saying that deals have been canceled, and discounts demanded before closing on property already in escrow. But stuff like that can happen without precipitating a market crash. At this point, someone entering a contract today will face less uncertainty that was in place a week or two ago.
But the statistics do show some trends that will likely play out in the next few months.
Inventory is moving down as sellers postpone listing their property. Historically new listings are at their lowest point in December and then begin to climb upward culminating in the late spring or summer. In March new listings dropped by over 25% from March of last year. This is really no surprise and I would say to any seller, if you can wait, it will be easier to sell later (as long as the market doesn’t get flooded with new listings).
Historically the number of buyers in the market at any given time fluctuates within a pretty tight band. Over the past 3 years in LA County, the lowest number of sold homes in a month was in January 2019 at 3,800, the highest was 7,800. March saw a significant drop in pending sales and I expect buyers to retreat until stay at home measures are lifted. But at that point, there will likely be pent up demand. Interest rates are expected to remain low, and we could see a more typical sales activity but with a summer peak coming later than in years past.
What truly drives the market price of a home, especially in LA County, is the number of homes for sale. If the tanking economy and rising unemployment put more and more homeowners at risk, we could see a sharp increase in the number of homes for sale over the summer leading to significant softening of price. But that’s not happening now for sure and there are a number of signs that there will not be a rush to sell when restrictions are lifted. Negative equity is now lower than it was before the 2008 recession and particularly low in California. So, we have a long way to go before sellers feel forced to sell. Other demographic trends that have limited inventory; baby boomers aging in place, avoidance of capital gains tax, etc are still pretty much in place and there are no signs that the COVID-19 pandemic will change these factors.
So if you are thinking of buying and are waiting for the market to crash good luck, my guess is that you will be waiting a while longer. If you are thinking of selling in the next year or two and want to get the most for your property, keep an eye on my monthly updates and if you see new listing levels rising and inventory growing, you may want to jump in before the market gets too inundated with homes for sale.