Will the US real estate boom or bust after the coronavirus pandemic is over? Here’s what experts think.
Over the past decade, the US housing market has been enjoying a decent stretch of gains. This is why many consider residential real estate a safe investment. But, while the US market was booming was last year, it’s on lockdown right now. It’s unnerving when we think about how much has changed in the past month after COVID-19 was declared a global pandemic. New construction sites are empty, agents can’t show houses in most states, appraisers can’t appraise and inspectors won’t inspect. It is quite evident that the US economy has already entered into a recession due to the coronavirus. Naturally, this causes real estate investors to think twice about their investments.
The coronavirus pandemic arrived just in time to disrupt the US real estate market boom. Low mortgage interest rates had sent home prices soaring last year as homebuyers took advantage of favorable lending terms. Furthermore, low inventory levels in the face of strong demand also led to higher prices. But now that people don’t have enough income to go around, the demand for real estate will head for a slowdown. In addition, the stay-at-home orders in most of the US have basically shut off the economy. As the coronavirus pandemic shows zero signs of stopping, it’s no doubt that the housing market has taken a hit in 2020. But what can we expect to happen after the COIVD-19 pandemic?
In this article, we take a look at real estate trends in the US to make housing market predictions and answer the question: will real estate boom or will there be a housing market crash after the end of the coronavirus? But first, it’s important to give a quick recap of the housing market boom and bust cycle to better forecast what will happen in the future.
Understanding the Real Estate Boom and Bust Cycle
The boom and bust cycle is the process of economic growth and decline that occurs repeatedly. A boom refers to a period of increased economic growth when jobs are plentiful and the market brings high returns to investors. Subsequently, a bust is a period of time when economic growth decreases, people lose their jobs and investors lose money. Since the mid-1940s, the US economy has experienced several boom and bust cycles but has been enjoying a housing boom since 2009 (after the great recession). But why do we have a housing boom and bust cycle instead of a long, steady economic growth period? It goes back to three forces that, when combined, cause a real estate boom or bust. They are:
- The law of supply and demand
- The availability of financial capital
- Future expectations
Strong demand is the leading force to creating a boom. When families are confident about the future, they buy more. They know they got good jobs and their homes and investments will increase in value. During a boom, banks make it easier to obtain credit by lending money at low interest rates. Individuals and businesses can then borrow money easily and cheaply and invest it in, say, technology stocks or real estate. Many people earn high returns on their investments, and the economy continues to grow.
The problem is that when credit is too easy to obtain and interest rates are too low, people will overinvest and the economy can overheat. In turn, there won’t be enough demand for, say, all the homes that have been built. When this happened, the bust cycle will set in. In this time, things that have been overinvested in decline in value. Investors lose money, consumers cut spending, and companies cut jobs. In addition, when those who borrowed during the boom cycle become unable to make their loan payments, credit becomes more difficult to obtain. Bust periods are referred to as recessions.
In the bust phase, the main force is plummeting expectations about the future. For example, when the stock market crashes or corrects, investors and consumers get nervous. Investors will then sell their stocks to buy safer investments that traditionally don’t lose value (like real estate investments). Moreover, as more companies start to lay off workers, consumers lose their jobs and stop buying anything but the necessities. In turn, that causes a downward economic spiral. The bust phase stops when supply lowers prices enough to fuel demand. In other words, when prices are so low that cash investors can start buying again and this restores confidence quickly.
Where Are We in the Real Estate Boom and Bust Cycle?
Here are some common economic indicators and real estate trends that tell us where we are at in the boom and bust cycle:
#1 The Stock Market
The stock market can be a gauge of where the US economy stands at any given time. When major stock market indices fell heavily from their peaks in February-March this year, this was the first sign of an economic slowdown. Indeed, the stock market crash 2020 was the fastest crash to happen in the United States at any time in the last century. Many took this as an indication that the bust cycle has begun. Over the past weeks, however, the stock market has rallied sharply, seeing the S&P 500 recovered 50% of the crash. So now, people are feeling a sense of relief and some experts now forecast a recovery sooner than most people initially expected.
#2 Unemployment Claims
In general, rising unemployment rates are often seen as an indicator of trouble for the economy, and falling unemployment rates are viewed as the opposite. The number of workers claiming unemployment benefits topped 10% in 2009. As of 2018, though, it has dropped to less than 4%. But since the coronavirus pandemic caused many companies to cur jobs, US jobless claims have jumped to a whopping 6.6 million.
To make matters worse, the International Monetary Fund now forecasts the unemployment rate in the US to jump to 10.4% this year. The CARES Act, however, may provide relief and support to several businesses and individuals, including a boon to unemployment benefits. This should also support a real estate boom because self-employed workers and contract-based workers in the industry can now file for unemployment wages.
#3 Consumer Confidence
The consumer confidence index measures how willing people are to make purchases in the upcoming 12-month period. A rating higher than 100 suggests people plan to spend money. Subsequently, a rating lower than 100 means people are more likely to add to their savings and hold off on major purchases. Naturally, the less willing people are to spend their money, the worse that can be for the economy.
According to the Conference Board, the consumer confidence index now stands at 86.9 for the month of April, a sharp decline from 118.8 in March. This should not be surprising as consumers now spend money only on essentials during the COVID-19 pandemic. This also explains why we’re seeing declining home sales in many markets across the nation. Simply, people are unlikely to commit a down payment on a home in the face of economic uncertainty.
Learn how the coronavirus is affecting major housing markets in the US on the Mashvisor blog.
#4 Real Estate Activity
An increase in new construction or rising values for existing homes are positive indicators for the economy and the real estate boom and bust cycle. On the flip side, if new construction slows or existing home prices flatten, that can be a sign of trouble. In the US housing market, there hasn’t been enough home construction in the past decade. In addition, one effect of the coronavirus is that a number of state governors have ordered to stop home construction in order to stop the spread of the virus.
This could be a bad sign, but before making any predictions, we also need to look at home prices and values. Because the supply of homes for sale is so constricted and mortgage rates are at all-time lows, most economists say that a 2020 recession won’t stop home prices from rising. Yes, home price growth had slowed, but it’s not expected to drop significantly any time soon. Meaning, they don’t expect a housing market crash in 2020.
What Will Happen After the COVID-19 Pandemic?
As you can see, it’s difficult enough to get an accurate read on where we are in the real estate boom and bust cycle. So figuring out where we are going months or years from now can seem next to impossible. Some booms in the housing market are followed by busts. But others are not. Some economists are saying that we are already in the bust phase of the cycle. They also predict a recession like the one we saw in 2008. On the other hand, others don’t predict the pre-coronavirus housing market boom to turn into a bust in 2020. This is because the US real estate market fundamentals are at a stronger footing than they were back then. Moreover, many measures are being taken to prevent a housing market crash.
Now, what does all of that mean for real estate investors? It might sound hard to believe, but right now is actually a good time to invest in real estate. Mortgage rates are low, home prices are stable, there’s a growing demand for rentals (as people can’t afford to buy), and you can find motivated sellers who might accept lower offers due to the crisis. To start searching for and analyzing the homes for sale in any US market from the safety of your home, sign up for Mashvisor now with a 15% discount with promo code BLOG15.
Final Words for Real Estate Investors
Wondering when the next real estate boom is? History shows that busts rarely last more than 18 months, so one might expect the next housing market boom to come in the fall of 2021 – that is, if the market turned into a bust. This makes sense because the measures to stop the spread of the coronavirus have paused the economy. It’ll take time to turn that massive machine back on once the protocols are removed. In addition, the housing market typically moves slowly as it takes time to buy and sell real estate.
Our advice for those investing in real estate is to be patient. Right now is the best time to do your market research and start a rental property search using online tools (like the ones Mashvisor has to offer)! You should also keep in mind that as the COVID-19 pandemic continues to develop every day, so does its impact on real estate and market trends. So make sure to check Mashvisor to stay up-to-date on the latest news surrounding COVID-19 and the US real estate market before making an investment. To learn more about our tools and how we’ll help you make faster and smarter real estate investment decisions, click here.