Home Shopping in the Age of COVID

Recent studies have shown that buyer sentiment is relatively low, and yet searches on google related to the home buying process are soaring. What is going on?

As of end of July, we saw bidding wars abound and a plethora of price INCREASES, the likes of which I’d never seen in my entire career. Inventory was relatively low, but it has been on the low side since I started in this business. Data showed on average an 8% drop in inventory for the month of June over last year. But this alone wouldn’t necessarily seem to tip the scales this far into seller market territory. This market was seeing aggressive buying behavior. Nearly every turn-key home in every price range from the mid-300k range into the luxury end had a bidding war, and it seemed as if sellers could name their price! Naturally, appraisals started to come in much lower than contract price, reminiscent of the housing surge that began in 2013 after the crash. The difference here, however, is that we were not emerging from a necessarily depressed housing market. Prices have not dipped tremendously as a result of COVID, and appraisers can use data that stretches as far as a year back to support value. These houses were going WELL above the supported market value.

It was not so much the dearth of inventory but rather an overabundance of buyer demand that has tipped the market to favor sellers. Most of the buying surge in my neck of the woods came from city folks who had spent the past 4 months couped up in tiny apartments, in buildings with limited HVAC ventilation, and had payed through the nose for the privilege of living in close proximity to work. Now that telecommuting was becoming more of a long term reality, with companies allowing their commercial leases to expire and starting to invest in IT software/infrastructure that would faciliate remote work, all but gone is the essential need to live in close physical proximity to the job. It has been reported that as much as 50% of the restaurants in the city are shutting their doors for good, and with the de-funding of police, increased riots and increased crime, the city has gone from a cultural mecca to a wasteland of fear and political rife. It is no wonder that once we hit Phase II of reopening, buyers came out in droves and flooded the market. Areas that buyers once shirked due to the long commute, like Dutchess County, suddenly saw an increase in interest.

The trends were clear. Buyers wanted land, space, and lots of it. They were clearly tired of being couped up and would live amidst cornfields and cow country to get away from their fire escapes. It certainly didn’t hurt that interest rates plummeted to below 3% on a 30 year fixed in many cases, elevating purchasing power to new heights. Proximity to highways was replaced by amount of acreage as the new prime criteria for home shopping. And if a home was turn-key and move-in ready? Well, it had at least 7 offers, that’s for sure. Even the fixer uppers, which typically struggled to move unless aggressively undepriced, saw a resurgence as a result of buyer desperation. It was mayhem.

But something else was happening as well…. as quickly as these buyers made offers, they were gone. Homes went from having 11 offers to none, or going to the lowest bidding, last man standing. Flaky buyers were so ubiquitous that it became abundantly clear that purchasing behavior was largely being driven by pure emotion. Once the dust settled and the thrill of the chase ceased, buyers got cold feet. Nonetheless, homes were still going into contract and selling well above their respective asking price and market value.

And then August hit. I don’t know if it’s the end of the honeymoon phase of the post-covid jailbreak, or if the reality of unemployment and overall economy trajectory has sobered the home buying populace, but purchasing behavior has definitely curtailed in the last few weeks, as evidenced by the drop in new first time mortgage applications. It could be the resurgence of COVID waves in some states that has dampened the optimism of economic rebound and caused a dip. Some homes fell out of contract, presumably due to low appraisal, sudden unemployment, or a combination of all those factors. The president’s executive order to extend unemployment at a reduced rate from $600 to $400 likely has some bearing on consumer confidence, as does the tightened Fannie Mae guidelines for lending. I suspect with it being August and with travel restrictions lifting, many buyers are probably finally taking their long-furloughed vacations and putting the search on the back burner. Losing multiple bidding wars is also enough to break one’s confidence. There are many factors leading to buyers slowing their home buying roll, and it is difficult to speculate which plays the largest factor.

Having said this, the market has not come to a stagnant halt by any means. But I do believe that these aforementioned factors are at least making buyers pause and consider the process, and the actual market value of the homes they are bidding on.

One thing I do pity is the plight of the seller whose home goes into contract well over their asking price as a result of the emotional buying frenzy, only to have that deal fall apart. I’ve already seen this happen with a few properties and, with a rising unemployment rate, I suspect this will happen more frequently. Once a seller goes into contract, they begin counting their money and planning their next move. When that falls apart it can be a devastating blow, particularly when the home has had multiple offers out of the gate and went over asking. Overnight they will have lost money, because the likelihood of another bidding war diminishes once it falls out of contract and has been sitting on the market. And with buyers cooling their heels, a second bidding war is even less likely. Sellers in these instances tend to also be reticent to accept any reasonable offer short of their asking price, even if their price was too high to begin with. As a result, they will spend even more time on market, only to eventually settle for an offer that is well below asking.

So is it a good time to buy? While it’s difficult to time the market, if I had to guess based on market indices, I would say it would not hurt to hold off. Interest rates, by all accounts, do not seem to be heading north anytime soon, and this cooling off period shows that we may be past the initial buying peak. I think the market has been riding high on emotion and government stimulus, but at some point the reality of our economy and unemployment rate (in NY it’s among the highest of the states at 15.7% currently per the U.S. Bureau of Labor Statistics) has to hit, and it’s difficult to believe that home prices and sales will continue to surge the way they did in June. That is not to say that prices will come down, necessarily but I do foresee, at the very least, a plateau in our near future.

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