The Current Pandemic Market 2020

Today I want to talk about the real estate market. Specifically, what in the world is happening to it right now in the middle of COVID19, focusing specifically on residential real estate.

First let’s get a few things out of the way before we dive into explaining the situation. Newsome has declared real estate an essential service and thus has continued uninterrupted during this entire time. Yes, there are additional rules such as additional disclosures as well as following safe health practices of wearing makes, staying socially distanced, sanitizing your hands and wearing disposable gloves.

We are also seeing a proliferation of virtual open houses and digital walkthroughs, but, though there are no open houses, people are still seeing properties in person by appointment, and completing all other aspects of the process in person as well like inspections. Many steps of the process are digital in regards to signing loan documents, recording deeds, pulling permits, and closing escrow.

With that out of the way, let’s talk about what I’m seeing in the market and my current outlook for the remainder of the year.

The first question I get often is are prices dropping, or will they drop? The answer to that is very unlikely, at least in any kind of significant way. Most entry level price points in Los Angeles, and that is likely anything from say $500,000 to maybe $800,000 are not seeing price drops. They are instead seeing multiple offers within days and prices that are over the asking price. I’ll get to why that is in a second.

But let’s just run the numbers for a second. I haven’t seen any predictions of prices dropping more than 2 to 3% so let's take the worst case scenario of 3% price drop. Keeping with round numbers, let’s use 1 million dollar purchase price, so a drop of 30,000 dollars. If you factor that into your mortgage, that’s around $117 less a month at current interest rates. However, with how low interest rates are at the moment consider this. That house that now costs $970,000 if purchased at interest rates a year ago, would actually be 313 dollars per month MORE than prices at $1,00,000.

That’s almost three times as much as the drop in price at current interest rates. When you factor in the fact that many people face 3% increases per year under current rent control rates in Los Angeles, you can see that a small drop in prices isn’t going to materially affect the majority of people who take out a mortgage for their first home purchase. Plus, prices rose close to 6% in 2019 so that would only be erasing half of last year’s gain alone. Furthermore, this scenario is for a 3% drop...for comparison Zillow predicts a 0.5% drop in the overall prices of Los Angeles in 2021. And regarding interest rates, the Fed has already stated that it intends to keep interest rates low and unchanging well into 2021, which means the above scenario isn’t changing soon.

The second question I get is that people have heard home sales have been down during coronavirus, why isn’t that leading to a drop in prices?

That’s a great question, but we need to look at the basics of supply and demand as well as what is actually happening in the market. Remember Econ 101? Price is a direct factor of the intersection between the supply and demand curve. If supply rises and demand stays the same, prices drop. But instead, what we are seeing, ie home sales dropping, is instead due to the opposite: supply dropping.

So if supply drops and demand stays the same, prices actually rise. And of course, if supply drops but demand drops equally, prices stay the same. Here is what is happening. Supply is dropping because of two main reasons: People are not putting their house on the market if they don’t need to sell. Either because they don’t want people coming through it during a pandemic or people that are testing the market are pulling back.

Now is definitely not the time to list that house that you bought two years ago put no work into $100,000 more than you bought it just for giggles. And third and maybe most important of all, interest rates are SUPER LOW. This means that many people that may have considered selling are instead refinancing and deciding to stay in their home instead at a lower rate.

Ok so we discussed why supply is low which is the direct cause of why total home sales have dropped in the past few months. What about demand?

I think there is a very strong case to be made for demand overall increasing, but at the very least, we haven’t seen a drop in demand. Let’s go over the reasons for this because I think they are more complicated and wide reaching than supply.

Let’s make the case for demand dropping: coronavirus has put many people out of work or on unemployment. I want to keep this video very analytical and stay away too far from the social commentary, but I will just come out and say this: that’s a huge bummer and its affecting a significant portion of people, my fiancee included.

However what we do need to keep in mind is that Los Angeles is a global city with high paying jobs from all over the world operating here. Many industries like tech are still going strong and instead shifting remote.

The sad reality is that the industries and people hit hardest from coronavirus are not likely the people that have the income and stability to be affording homes in one of the most expensive real estate markets in the world. The people with cash still have cash, and the people with six figure income are very likely to continue to have those jobs. Thus, they are still buying and selling houses.

How about a case for supply rising due to foreclosures from people not being able to pay their mortgage? Well, it's a complicated process. I think we will see some foreclosures, but current data doesn’t show any significant increase in foreclosures across LA County.

Much of this is due to the fact that banks don’t WANT to foreclose on a house. They are not in the business of selling homes, they are in the business of managing money. And they would much prefer to go into mortgage forbearance rather than foreclosure, because that means that they can at some point continue to receive regular payments, and add any missed payments to a later date that could be as far as the end of the loan term.

Again, mortgage lending standards have increased significantly since the 2008 crash and homeowners that purchased in the last 10 years or so have far more equity invested which means they are far more likely to keep paying their mortgage or renegotiate.

Finally let’s talk about reasons demand might increase. We’ve already talked about interest rates being at historic lows so purchasing power for individuals is at therefore a historic high. How about general cultural trends that have started to accelerate?

One of the major ones is telecommuting and work from home scenarios. The world has been shifting towards forms of digital working situation for years now, and work from home is not new. A global pandemic simply caused that trend to rapidly accelerate, to the point that businesses needed to pivot and do so immediately.

Though I personally can’t see a situation where working in an office is gone forever, I know we will see an increase in jobs that are dedicated work from home, an increase in jobs with flexible work from home situations, jobs that are a hybrid situation, say work from home 3 or 4 days a week, and dedicated office space shifting to smaller, nimble, more hybrid situations to accommodate.

What word did I say over and over again? Home. Work from home. That means that people are very rapidly evaluating what home means to them and are facing the idea that homes will likely need to have some kind of work space included from now on. That may be as simple as a den converted to an office, or may be as drastic as needing to sell a two bedroom and buy a four bedroom house.

A bonus prediction from me here for the city of Los Angeles is this: if people are going to demand more space but have to stay at the same price point, they have no choice but to look further outside the city to the suburbs. What used to be an option that wasn’t even considered due to crazy commute times suddenly seems far more reasonable with work from home. I’m predicting an increase in value of homes in the suburban areas of the city, which I think will only be accelerated by the increase of self driving technology that is rapidly advancing for use in major metropolitan areas.

That’s just a prediction, but to me it seems very logical. All in all though, I do believe this is a major driver of an increase in demand for housing.

Finally, I want to leave with a parting observation that I think many people forget about but I do believe, at least my research leads me to believe is a demand driver more than people realize. I took a look at the moving data since March in the United States. Sure the usual suspects are popping up on the list for their lower cost of living such as Austin, Portland, Denver, Charlotte, etc.

But what are the three cities people are leaving the most? New York, Chicago, and San Francisco. And where are they moving to? Well what would be the opposite of cold, highly condensed city centers that still have the global job markets? Hmmm...how about the sunny sprawling oasis of single family homes that is Los Angeles.

That’s right, and that isn’t just a guess either, data is backing that up. Those cities have real estate values and salaried positions that are equal to if not greater than Los Angeles, so people moving from those cities, assuming they keep their jobs or move to something comparable, are having no problem paying our prices.

To wrap up here, there is a huge amount of uncertainty lingering over all of us right now. We all have questions about where many aspects of our lives are headed and what we should do about it. That being said, if we focus specifically on the residential real estate market, for the reasons we just talked about, I see no major crash in the future.

Instead, the age old advice remains as sound as always: Never try to time the market. The right time to buy a house is the right time you, personally.

Thanks for watching, I hope you got some helpful information from this video. If you’re interested in purchasing your first home, my contact information is below, I LOVE working with first time home buyers. And if you’re thinking about selling and making a move, don’t hesitate to reach out, I offer all of the digital tools that are required for selling your house in this day and age. Thanks again!