As the effects of COVID-19 continue to unfold, you may be wondering whether now is a good time for real estate investing — and you wouldn’t be alone. Businesses are closing left and right, stocks are falling, unemployment claims are skyrocketing, and millions of Americans have been urged to stay at home. There’s a lot of uncertainty surrounding our current situation.
Is that uncertainty affecting the housing market too?
According to a recent FinanceBuzz survey on home buying, only 1 in 4 Americans who were planning to buy or rent a new home between March and June 2020 are following through with these plans. And over 60% of Americans claim 2021 is the soonest they would feel comfortable buying or renting a new home.
So what does that tell us about the real estate market? Is it a good time to buy real estate? The answer could be yes or no depending on your situation and your goals.
Why it could be a good time to buy real estate
Expert opinion on the subject of real estate investing is wide-ranging. Some say the current economic situation makes it a prime time to buy real estate, whereas others say you should hold off. Here are some reasons why now might be a good time to start investing in real estate.
Record low interest rates
Although the Fed’s move to cut interest rates to near zero percent doesn’t mean mortgage interest rates will drop to zero percent, mortgage rates are indeed hovering near historic lows. According to FreddieMac, a government-sponsored company that buys and packages mortgages into mortgage-backed securities, the average 30-year mortgage has fallen to 3.33% as of April 4, 2020, down from 4.08% a year earlier.
Over the span of a week back in the beginning of March 2020, mortgage applications jumped 55% as a result of these record low interest rates, according to HousingWire. In addition, demand for refinancing rose to an almost 11-year high.
Lower interest rates provide an opportunity to lock in lower-cost borrowing and keep more money in your pocket. Real estate attorney and investor Rajeh A. Saadeh says this makes it an ideal time to start purchasing real estate.
“It is an excellent time to buy real estate,” Saadeh says. “Mortgage interest rates are down, which means it is a great time to borrow.”
Real estate prices might drop
COVID-19 and the associated virus are injecting a lot of turmoil into the world. We’re seeing the financial markets being crushed and fears of another housing bust might motivate sellers to make a sale now before their homes are worth less.
Job loss also continues to rise, which may lead to the real estate market having a smaller buyer pool. Fewer buyers may result in prices dropping if sellers are intent on selling. Job loss may also lead to a rising number of foreclosures, which can lead to even more opportunities for savvy buyers.
It’s still early, though, so it remains to be seen how the housing market will be impacted.
Why it could be a bad time to buy real estate
Not all real estate experts are yelling “buy, buy, buy.” In fact, there are several reasons now might not be the best time to buy real estate.
Although lower interest rates make borrowing money more affordable, lending restrictions are already beginning to take place, according to Brian Davis.
“Financing terms have already tightened considerably. It's much harder to get a loan now than it was six weeks ago,” Davis says.
Bank of America’s standards for home equity lines of credit (HELOCs) are being “aggressively” tightened as more and more Americans tap into their home equity “as a buffer against an economy tipping into recession,” according to American Banker, a daily newspaper and website covering the financial services industry. Wells Fargo has taken similar actions, and Fannie Mae and Freddie Mac also announced they are tightening some lending standards.
The Federal Reserve’s January 2020 survey of senior loan officers also found banks are expecting tighter standards on loans across the board because of a deterioration in the quality of potential loans, which means borrowers may be more likely to default.
So although interest rates for loans and mortgages are at optimal levels, it may be more difficult to get approved for and benefit from them.
Prices might not drop substantially
According to a recent FinanceBuzz survey, 72% of Americans fear a recession is on the horizon. Some say it’s already here. So how will a recession affect real estate prices?
The real estate market isn’t recession-proof, but sometimes it acts as though it is. With the exception of the Great Recession, the housing market has proven resilient during recessionary periods, according to First American, a title insurance company.
“While the housing crisis is still fresh on the minds of many, and was the catalyst of the Great Recession, the U.S. housing market has weathered all other recessions since 1980,” writes Odeta Kushi, deputy chief economist at First American. “In fact, the housing market may actually aid the economy in recovering from the next recession — a role it has traditionally played in previous economic recoveries.”
The chart below was created by the Federal Reserve Bank of St. Louis and is based on U.S. home price data provided by S&P Dow Jones Indices. It shows the trend in U.S. home prices dating back into the 1980s. The vertical gray bars represent our last three economic recessions. As you can see, the housing market fared pretty well during economic contractions, aside from the 2007-2009 Great Recession, which was unique.
On March 19, 2020, CNBC reported that Michelle Meyer, Bank of America’s chief U.S. economist, wrote in a note to investors that the U.S. economy is in a “deep plunge” due to the global coronavirus outbreak. But although we might see another gray bar, indicating a recession added to this chart, only time will tell if we’ll see a drop in home prices.
Social distancing could shrink the market
As restrictive measures on people’s movements continue to escalate, it’s possible the housing market will begin to crater as well. Millions of Americans across the country have been ordered to stay home. Home buyer interest is dropping. Scheduled open houses and home tours are being restricted and canceled.
As a result, home sales could fall by 35% in the second quarter of 2020, compared to the last quarter of 2019, according to recent analysis by Capital Economics.
“Increasingly restrictive measures on people’s movement and an imminent surge in unemployment” are the forces driving this possible plunge in home sales, according to Matthew Pointon, a property economist at Capital Economics.
These stay-at-home orders aren’t only limiting home-buying opportunities, but also the possibility for house flippers to complete necessary renovations to get their properties back on the market. States such as Washington have declared construction nonessential, and therefore not exempt from Governor Jay Inslee’s statewide stay-at-home order.
Mike Qiu, a fix-and-flip and rental investor in the greater Seattle area and owner of Good As Sold Home Buyers lives in Washington and echoed these limitations.
“Non-essential construction is currently not allowed in my state of Washington,” Qiu says. “So technically no traditional residential renovations are allowed, except if there is an emergency.”
Whether it’s a stay-at-home mandate or fear of venturing outside your home, it seems unlikely the real estate market will be able to avoid the effects of social distancing.
Best of both worlds?
Being required to stay at home doesn’t mean you have to stop investing in real estate altogether. Fundrise, an online real estate investing firm, makes it possible, and easy, to invest in real estate from the safety of your home.
When you invest with Fundrise, you can invest in private real estate through the company’s proprietary eREITs (real estate investment trusts) or eFunds. These provide low-fee access to a diversified portfolio of real estate investments spanning commercial, residential, and single family properties. There are three account levels to choose from depending on your goals: Starter, Core, and Advanced. Returns are deposited right into your bank account. And you can get started investing with Fundrise with just $500.
Bottom line on buying real estate right now
Whether now is a good time to buy real estate might depend on the type of project you have in mind. As the market continues to rapidly change, house flippers might face more challenges than those looking to purchase real estate for the long term.
Aaron Katz, franchise owner at We Buy Ugly Houses Boston, says buy-and-hold real estate investors are looking at prime opportunities.
“This may be one of the best times to invest in buy-and-hold properties that you intend to hold for the long haul,” Katz says. “With the uncertain times to come over the next year or two, investing in rental properties now that you intend to hold for a long period of time will allow you to benefit from possible great deals due to the uncertainty … If you are looking to flip right now, do so very cautiously and very quickly to ensure you buy and sell in the same market.”
The sheer amount of uncertainty around the globe makes it difficult to judge whether 2020 is a good time to invest in real estate. Record low interest rates are enticing, but fear and restrictions on people’s movements are discouraging.
That being said, your local real estate market may adjust differently than other markets around the country. If you’re familiar with your local market and have a strong financial position, low interest rates and the possibility of declining prices might make your investing rewarding.