The Third Wave of COVID-19 and the Affects on the Real Estate Housing Market

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How the Third Wave of COVID-19 Will Affect the Real Estate Housing Market

2020 has been a tough year for the entire human race. With unprecedented severe weather, political unrest, and the combined scourges of a global pandemic and a corresponding economic crisis, it’s no wonder that the effects are widely felt.

As the pandemic has worsened, the impacts on the real estate market have shifted as well. For example, a wave of evictions and foreclosures is expected in the first half of 2021, as rent comes due and tenants begin to lose the critically important government protections that stand between them and homelessness.

In a time of such uncertainty, it’s hard to see what’s coming next. Let’s see what the experts in the field have to say:

 

What could the third wave of COVID bring that the first two didn’t?

According to statistics of new cases, we are in the third wave of COVID, explains Dr. Jiro Yoshira, Associate Professor of Business at The Pennsylvania State University.Although new cases can be misleading because they depend on the number of tests, death statistics also indicate that we are in the third wave.

Furthermore, future waves can be even larger than the current one. The 1918 Spanish Flu pandemic saw the fatal second wave occurring one year after the first. In contrast, we have already seen three waves within a year. The cycle may have become shorter due to people’s high mobility in modern society, but we may see a massive wave after this year.”

Dr. Yoshira states that “if future waves result in more cases than medical capacity, they will impact the economy more significantly. On the other hand, we can develop new vaccines very quickly. We may be able to tame the current pandemic. So, what’s certain is that we are faced with considerable uncertainty.”

 

What will happen to property values in a third wave?

While the pandemic has harshly affected many aspects of the world, it appears one thing that has weathered the storm better than others is property values. It would be natural to assume they have taken a big hit, but according to Dr. Jiro Yoshira, “home prices are remarkably pexels-cottonbro-3952232resilient to the current pandemic, at least so far. According to the S&P CoreLogic Case-Shiller Home Price Indices, single-family housing prices did not decrease in most cities during the pandemic. Instead, home price appreciation has been accelerating after June 2020.” 

Dr. Andra Ghent, Associate Professor of Finance at UNC Kenan-Flagler, adds, “short-term, suburban residential, especially for luxury homes that have room for home office and that cater to skilled workers that can work from home will see rising rents.” She also states, “suburbs that can recreate walkability and density (amenities that high-income households value) long-term will do better than those that can’t.”

While that is good news, for now, he also cautions it is important to remember that, “the resilience of residential property prices are thanks to massive policy interventions, including the extended CARES Act. When the CARES Act programs expire at the end of December, more than 13 million people claiming extended jobless benefits could lose their benefits. I hope new legislation will be enacted to mitigate the negative economic shock caused by the prolonged pandemic, but again, the outlook is uncertain.”

Dr. Jacob Sagi, Professor and Distinguished Scholar for the Wood Center in Real Estate Studies, at the Kenan-Flagler Business School echos this, stating that while, “everyone is anticipating a vaccine to help restore us to “normal” by summer, if stimulus backstops widespread income hemorrhage, relatively few folks would be forced to sell at deep discounts.” For that reason he anticipates until a vaccine is widely available, the market will be flat.   

 

What property sectors are most likely to be affected?

Not all property sectors will be affected the same during the third wave, but there does seem to be somewhat of a pattern from previous waves that we can look at. According to Dr. Yoshida, the Penn State ACY Marginal Rent Index suggested apartment rents would decrease in May 2020, a few months after the first wave. In September 2020 rents declined slightly again, just a few months after the second wave of new cases. This leads to the conclusion that a few months after the third wave rents could fall even more significantly. 

Unfortunately, according to Dr. Yoshida, “hotels and retail properties are most severely affected. It is because the demand for these properties is based on people’s travels. In the current and future waves, this tendency is likely to continue. However, all property types would experience more substantial downward pressure.”  

In contrast apartment properties and warehouses seem to be faring better so far. “Real Capital Analytics’ commercial property price index (CPPI) indicates that apartment prices did not decrease after the first wave. Warehouses were another property type that was not severely affected by the pandemic thanks to an increased demand for online shopping,” states Dr. Yoshida. That being said, he also cautions, “apartment properties [might] decrease soon after the CARES Act expires because residential lease terms are short. Office lease terms are longer, but the landlord will face a choice of tenant default or lease renegotiation on rent abatement.”

Dr. Ghent echoes a similar sentiment calling out that, “retail rents will continue to fall (especially malls), industrial will continue to rise. Street-level retail is having a really hard time right now because the tenants operate on such thin margins and don’t have access to financing, unlike credit tenants in malls, but I see it as less vulnerable long-term in places that can recreate walkability.” She also sees that long-term there will be about a 15-25% fall in CBD office rents. However she does iterate, “public markets are currently overestimating the price falls in hotel and apartments right now.”

 

Do you foresee a surge of foreclosures?  

While the housing market has been resilient this far, that may change in the coming months. Dr. Sagi states, “[it will depend] on whether adequate stimulus is provided and the degree to which forbearance is mandated. Congress has yet to act, but I think the chance is more than fair that it will (before any foreclosure wave).” 

And yet, Dr. Jiro Yoshira cautions, “even if the CARES Act is extended, intensive public support cannot continue for years. When public support fades, the economy will face economic fundamentals. An increase in residential mortgage default is inevitable, particularly because secondary financing such as a second mortgage is less readily available than before the Global Financial Crisis. We’ll also observe more lease defaults and evictions.”

 

Do you have advice for home buyers and sellers for the third wave?  

With all of this uncertainty in the market, we asked the experts for a little advice. 

Dr. Yoshira offers the following advice: “First, be careful not to get infected during the home transaction process! Second, buyers and sellers have to keep an eye on policy announcements. Policy and political risks are more significant in the current environment thanpexels-pixabay-355952 ever. A quickly evolving policy debate is hard to predict due to the complex and unconventional nature of the emergency programs. Third, a buyer should mind mortgage rates and points in this low rate environment. Borrowing rates are at the historically lowest level at around 2.7% for a 30-year fixed-rate mortgage. In this environment, a small difference in a borrowing rate makes a surprisingly large impact on the total cost. For example, for a $200,00, 30-year fixed-rate mortgage, the difference between 2.7% and 3.0% rates can create up to a $22,212 (or 11%) difference in the present cost. Finally, the buyer’s employment status can be a large risk factor for both the buyer and the seller because the employment status will change the availability and the cost of mortgage financing.”

Dr. Andra Ghent advises, “…don’t focus on the short-term effect of COVID. Property valuation is about the long-term stream of cash flows, not cash flows for the next six months. So what really matters is how the accelerated technological adoption will change the structure of cities and work going forward.”

 

While none of us can predict the future, we hope the advice and knowledge from these experts can help in understanding what the third wave of COVID might bring.