COVID-19’s Impact on Housing Prices
Written by Nathan Kuhn August 4, 2021
The fallout from a Black Swan event, like the COVID-19 pandemic, can manifest itself in counter-intuitive ways. The economic devastation seen throughout the world in 2020 is undeniable; yet, amidst the havoc, we also witnessed one of the biggest booms in housing prices in U.S. history. According to the Case-Shiller National Home Price Index, which tracks price changes of single-family homes, housing prices rose 9.5% from November 2019 to November 2020. How does this happen while we’re simultaneously dealing with the worst pandemic in 100 years?
The Impact of COVID on Housing Demand
As COVID worsened, the government took action that, in turn, spurred demand for home buyers. Here’s how:
- Stimulus checks bolstered bank accounts of many Americans whose incomes weren’t badly affected by COVID in the first place.
- More importantly, interest rates collapsed. At the start of 2020, the average 30-year fixed mortgage rate was about 3.74%. At the beginning of 2021, it cratered to 2.75%.
To illustrate, consider the example of a couple buying a $400,000 home with a 20% down payment and a 30-year mortgage loan. At 3.74% the couple’s monthly payment is $1,388. At a rate of 2.75%, their payment is only $1,225—a savings of 11.7% in just one year’s time!
Whether they were buying their first home or trading on an existing home, many homeowners have been anxious to take advantage of their increased buying power.
The Impact of COVID on Housing Supply
There’s also a housing supply aspect to consider. The availability of new homes has been a concern for years and COVID quickly made it worse:
- Builders faced numerous constraints in their ability to construct new houses. Prices of lumber as well as other necessary commodities shot through the roof and were often delayed in delivery. Additionally, we’ve seen a massive shortage in the availability of skilled labor.
- Compounding this, people who otherwise might have put their house on the market elected to stay put. Some were nervous in the face of a global pandemic, others simply didn’t want strangers coming through their house and breaking quarantine.
Together, these pieces begin to explain the surge we’ve seen in home prices. It’s economics 101: when growing demand meets lack of supply there’s nowhere for prices to go but up.
Evaluating Real Estate Investments in a COVID Market
There are many factors at play in the real estate market; certainly, we think housing supply is an important part of the picture. We firmly believe thorough sponsor- and property-level due diligence of DSTs are even more important during these interesting times of constrained supply. We also believe it’s important to consider macro forces at play, including housing prices discussed above, when evaluating potential investment opportunities for our clients.
To learn more or discuss further, please call or email us anytime.
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The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsors Private Placement Memorandum (PPM) which is solely available to accredited investors and accredited entities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years, and reasonably expects the same for the current year) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investor’s situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.
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