Summary
The U.S. residential real estate market experienced significant changes during the COVID-19 pandemic, which resulted in a sharp decline in home sales amid rising house prices. Health concerns, stay-at-home orders, and economic uncertainties led to a considerable drop in home sales, particularly in spring. Despite the initial expectations of a downturn in housing markets, house prices unexpectedly surged, increasing by around 10% in 2020, and a further 15% rise was observed by July 2021. This increase was attributed to a variety of factors, including historic low interest rates, government fiscal stimulus, and significant changes in household activities and consumption patterns.
The supply of houses was disrupted due to the pandemic, and a decline in inventory persisted despite a recovery from the April lows. However, by December 2024, existing home sales had risen to a seasonally adjusted rate of 4.24 million, marking the strongest pace since February of the same year. Despite higher mortgage rates, more homes began to be listed, suggesting some sellers were entering the market. Even so, listing prices continued to rise, but the availability of more small homes led to a lower national median list price than the previous year.
Factors contributing to the decline in home sales while record-breaking prices persisted include economic impacts of remote working, rising interest rates, record high home prices, tight supply coupled with high demand, inventory shortage, regional sales variation, and housing subsidies. The fluctuation of interest rates significantly influenced home affordability and overall real estate market activity. During the pandemic, mortgage interest rates hit an all-time low of 2.65% in January 2021, making mortgage payments more affordable despite the fast-rising home prices. However, a sharp increase in interest rates led to a significant decline in housing affordability.
The COVID-19 pandemic, coupled with government incentives and policies, had a substantial effect on the U.S. residential real estate market. Changes in home prices and affordability, the shift to remote work, and changes in government policies and demographics all contributed to the trends observed in the housing market. Understanding these changes is crucial for making informed decisions in the real estate market.
Background
The COVID-19 pandemic greatly impacted the U.S. residential real estate market, particularly during the spring months. Health concerns, stay-at-home orders, and economic uncertainty led to a significant drop in home sales in many metro areas. However, despite initial predictions of a downturn in housing markets due to increased uncertainty regarding health, the macroeconomy, and social circumstances, house prices actually saw a considerable rise. In fact, house prices increased by around 10% in real terms in 2020 and further rose by 15% in the year leading to July 2021.
This unexpected rise in house prices was likely due to a combination of factors. During the early years of the pandemic, interest rates fell to historic lows, and millions of consumers either purchased homes or refinanced to lower interest rates. Despite home prices rising faster than incomes, these low interest rates made mortgage payments more affordable on a national level. Despite the increase in unemployment, real borrowing costs decreased, and the US government provided substantial fiscal stimulus. Moreover, household activities and consumption patterns underwent significant changes during this period.
Additionally, the pandemic led to a disruption in the housing supply. New listings, despite recovering from their April lows, were only slightly higher than one year ago through August, leading to a continuing decline in inventory. Despite these challenges, by December 2024, existing-home sales had risen to a seasonally adjusted rate of 4.24 million, marking the strongest pace since February of the same year. This was the largest year-over-year gain since June 2021, signifying a recovery in the market.
However, even with higher mortgage rates, more homes started to be newly listed on the market according to the Realtor.com® January housing data. This suggests that time and natural turnover may be leading some sellers to enter the market despite the higher rates. At the same time, listing prices continued to increase, albeit more small homes being available led to the nation’s median list price being lower than the previous year.
Contributing Factors to the Decline
Several factors contribute to the sharp decline in home sales while record-breaking prices persist.
Economic Impacts of Remote Working
The shift to remote working, as a new trend, has resulted in less commuting, consequently leading to a drop in automobile sales, fuel demand, and use of transportation modes. This trend has adverse economic impacts that result in lesser tax earnings for the government.
High Interest Rates
The rise in interest rates has significantly impacted the housing market. The increase in mortgage interest rates from 2.65% in January 2021 to around 6.2% in September 2024 resulted in drastically decreased housing affordability. The average 30-year fixed mortgage rate increased to a two-decade high of 7.1 percent late last year. Although mortgage rates have decreased slightly in recent times, they have stayed just under 7% for five consecutive weeks.
Record High Home Prices
By mid-summer 2024, home prices reached all-time highs. However, home prices fell from August to November, although the decline was less than 1% from July’s peak levels. The tight supply of homes for sale contributed to higher prices. The median price of a home sold in January was $396,900, up 4.8% from the year before and the highest price ever for the month of January.
Tight Supply and High Demand
The number of homes actively for sale continues to be higher compared to last year, growing by 24.6%, a 15th straight month of growth. Even in the markets at the bottom of the list, like Louisville, KY, Memphis, TN, Honolulu, and Des Moines, IA, the market is performing well and favoring sellers due to the high demand for housing.
Inventory Shortage
The country had just a 3.3-month supply of inventory in December, well below the 5 to 6 months needed for a balanced market. In addition to this, the reluctance of homeowners who locked in super-low mortgage rates in 2020 and 2021 to sell their homes for new ones with higher interest rates contributes to the relatively low inventory.
Regional Sales Variation
Regional variations in sales also contributed to the decline. Sales fell in the Northeast and Midwest, but rose in the South and West. In the West, sales dropped 7.4 percent to an annual rate of 750,000, up 1.4 percent from a year ago.
Subsidies
Housing subsidies have also impacted the market by reducing the after-tax cost of housing. This enables people to pay more than they otherwise would, causing prices to rise, particularly in markets where supply cannot easily increase to meet the higher demand.
Impact of Interest Rates on Home Sales and Prices
The fluctuation of interest rates plays a significant role in home affordability and, subsequently, the overall activity in the real estate market. During the COVID-19 pandemic, mortgage interest rates dipped to an all-time low of 2.65% in January 2021, making mortgage payments more affordable at a national level, despite the fast-rising home prices. This low interest rate period greatly influenced the market dynamics, prompting a surge in demand for real estate, which further drove prices up.
However, the interest rates started increasing post-January 2021, peaking at 7.79% in October 2023 before settling around 6.2% in September 2024. This sharp rise resulted in a significant decline in housing affordability as mortgage payments for a $400,000 loan escalated by over $1,200 from its lowest point. For a median-priced home, with a 5% down payment, there was an increase of $1,532 or 113% from 2021 to 2023.
Even after a modest dip in both the interest rates and home prices, the increase remained at $1,040 or 77%. This combination of elevated rates and home prices drastically impacted the housing affordability for a typical household. For instance, in 2019, a household earning $69,000 a year could afford the median home in the market with about 26% of their monthly income going towards the principal and interest payments. By contrast, from August through November 2024, despite the modest decline in housing prices, homebuyers had to grapple with persistently high mortgage rates and rising home prices.
The rising interest rates pose challenges for both homebuyers, who must contend with steeper monthly payments, and sellers, who see less demand and lower offers for their homes. Consequently, these shifts have a significant influence on the real estate market, with potential long-term effects. Understanding these changes is crucial for making informed decisions in real estate.
Effect of the COVID-19 Pandemic on the Housing Market
A wide array of pandemic-related factors, including an increase in unemployment, reduced borrowing costs, and significant fiscal stimulus from the US government, affected housing demand.
Changes in Home Prices and Affordability
Amid the pandemic, home price growth accelerated across the country, with higher acceleration observed in the South and West. These trends correspond with greater population growth in these regions, as population growth tends to drive up home prices.
Impact of Remote Work on the Real Estate Market
The shift towards remote working, significantly noted during the pandemic, has a clear relationship with real estate. This trend has not only impacted the commercial real estate market but also the housing market itself, with a noticeable increase in suburban rents and house prices compared to urban locations. High-income remote workers, primarily in tech and finance, expanded their horizons in search of larger homes and more amenities, leading to a rise in prices in suburban areas.
Effect of Government Policies and Demographics
There were also noted differences in housing system policies across countries. In some places, where the government held significant influence over the real estate market, the differences in resident income were small, and housing-related subsidies were robust. Major demographic shifts in a nation can also influence real estate trends and affect housing prices and the demand for specific types of properties.
Role of Government Incentives on Home Sales and Prices
Government incentives, including tax credits, deductions, and subsidies, have a substantial influence on property demand and prices. Such mechanisms are often employed to regulate the often volatile real estate market. Notably, in the aftermath of the economic downturn, businesses have increasingly utilized tax incentives to subsidize the financing of real estate construction and renovation projects. These incentives necessitate comprehensive strategic planning upfront, taking into account the inner workings of the tax incentive program, and in the case of syndicated tax credits, the needs of potential tax credit investors.
Tax abatement is one of the numerous incentives offered. This program reduces real estate taxes for the increased value of the property as a result of the project for a specified term. Essentially, tax abatement serves to stimulate economic activity and growth.
These government incentives can significantly impact trends in home sales and prices. For instance, in 2009, the U.S. government introduced a first-time homebuyer’s tax credit aiming to stimulate home sales during a sluggish economy.
Sellers, on the other hand, should consider offering subsidies under certain circumstances. This decision should be based on several factors, including current market conditions, demand for homes in their area, and their financial situation. If the seller decides to offer a subsidy, the terms should be negotiated with the buyer, and it is advisable to work with a real estate agent to ensure these terms are reasonable and legally compliant. Offering a seller subsidy can be a strategic move, particularly in a buyer’s market where there are more homes for sale than there are buyers. However, sellers should weigh the pros and cons to make an informed decision that aligns with their financial goals and priorities.
The content is provided by Blake Sterling, Financial Pulse Now
