How Did COVID Affect the Housing Market?


|14 min read

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how has covid impacted the housing market

To say that the COVID-19 pandemic has impacted the US real estate market would be an understatement. In fact, it’s hard to imagine any market that wasn’t affected by the pandemic.

We watched the world face uncertainty, fear, and one of the most significant cultural shifts in recent history. How we live and work will never be the same, and it’s still unclear how and when the pandemic’s impact on the housing market will subside.

Today, remote and hybrid work environments continue to be a driving force where we work, commute, and live. In addition, the pandemic led to consumer and economic changes that will continue affecting home ownership and investing for years to come.

The housing market before COVID

The real estate market just before the pandemic started strong, driven by a robust economy and attractive rates. According to FRED Economic Data, the median US house prices rose from $313,000 in Q1 2019 to $327,000 in Q4 2019. This represented an attractive 4.47% average increase, indicating a solid seller’s market that favored sellers.

One of the major challenges worth noting is the pre-pandemic levels of limited housing inventory (which might sound like a familiar story if you’re paying attention to today’s market). Half of the nation’s largest markets saw a decline in transaction numbers.

From 2013 to 2020, housing prices only rose a moderate average of 5% annually. Metro areas still had the strongest home values, and expensive cities like San Francisco, Los Angeles, and New York seemed like they’d never lose momentum.

Housing affordability was improving.

It might seem odd to hear, but 2019 saw housing affordability improve. Incomes were rising at a faster rate than home prices. For years, home prices had been rapidly increasing, but income growth remained comparatively stagnant.

Further improving housing affordability was declining interest rates. The average home mortgage rate dropped from 4.54% in 2018 to 3.94% in 2019. These changes meant that nationally, housing affordability increased by 5%.

These key factors created buyer-friendly conditions, contributing to a rise in demand, especially in the suburbs of major cities, which experienced the most price growth.

A new generation seized a large share of the market.

The millennial generation is no longer wrapped up in their college degrees. Instead, many of the most educated generation in US history are nearly a decade into their careers, meaning that their incomes have grown, and they now hold considerable purchasing power. They’ve worked hard to claim a foothold in the industry, and in 2019 many of them did the same with the market.

In 2019, millennials became the generation with the most loan originations as many transitioned into homeownership. Therefore, 2019 saw an increase in housing demand both for rental properties and purchases.

The housing market at the onset of COVID

On January 31, 2020, the Secretary of the Department of Health and Human Services, Alex Azar, declared the 2019 Novel Coronavirus outbreak a public health emergency. The world quickly began to close in on itself.

At the start of the pandemic, residential real estate markets across the country experienced a temporary lull in housing activity. As people sheltered in place and businesses closed, housing sales and new construction hit the floor.

Real estate professionals and investors feared for their businesses, and there appeared to be little hope in sight as shelter-in-place conditions were repeatedly extended. We lived in a world filled with uncertainty and fear, which doesn’t foster real estate growth.

COVID’s initial negative impact on the housing market didn’t last long

While housing markets initially quieted during the pandemic, that didn’t last long.

Soon, the property market began to pick up with revitalized demand, but home buyer preferences had changed.

Early pandemic months

During the early months of the pandemic, the residential real estate market experienced a shift in the mix of homebuyers due to the negative economic impact of social distancing measures.

According to data from the National Association of Realtors, first-time buyers increased in numbers, accounting for 36% of all home purchases in April 2020 compared to 32% the previous year.

On the other hand, investor buyers became more scarce, leading to a decline in sales for investment rental or vacation use, dropping from 11% in February to just 10% in April.

The decrease in investor buyers also resulted in fewer cash sales, which made up only 15% of existing home purchases, down from 20% in the previous year.

A change in homebuyer demand saw smaller markets experience huge appreciation.

The pandemic brought about significant changes in how people live, work, and decide where to live. One of the major changes in homebuyer demand during the pandemic was the shift away from urban areas.

With many people working from home, the need to live close to work was less pressing. As a result, homebuyers began looking for properties further away from major cities, where they could find more space for a lower cost.

This shift away from urban areas caused a surge in demand for properties in suburban and rural areas, which led to increased competition and higher prices in those markets.

Another change in homebuyer demand was the shift towards larger homes. As more people spent more time at home, there was a growing need for additional space, especially for families with children.

Homebuyers wanted homes with more bedrooms, bathrooms, and outdoor spaces where they could enjoy their hours at home.

This trend led to a surge in demand for larger homes and decreased demand for smaller properties.

The pandemic also changed the way people rent.

With the shift towards remote work, people looked for rental properties that offer more space, privacy, and flexibility. This change in demand was also seen in the rental market, as many renters shifted from their city apartments to larger properties.

States like California saw a shrink in household size as renters and homeowners sought out more space, and there was less shared housing. This put further pressure on the housing market.

Finally, the pandemic caused a change in the type of amenities that homebuyers and renters look for. With more people spending more time at home, the need for amenities such as home offices, gyms, and outdoor spaces has increased.

Instead of checking to see how far their commute would be, many homebuyers asked if there was a designated work space or sought out an extra bedroom that they could turn into a home office. Or, they prioritized their distance from some of their favorite activities.

While no longer as significant, these home buying and rental preference demands continue today.

Interstate migration during the pandemic

Interstate migration during the pandemic was a major driver of housing market shifts.

For the first time in history, many Americans were free to choose where to live while holding their remote jobs. The opportunity to move to more affordable markets with lower housing prices or areas with a better cost of living was placed in their hands.

As a result, some states, such as California and New York, home to the country’s most populated metropolitan economic powerhouses, saw a decrease in population.

With the growing trend towards remote work, living in a city center like San Francisco or Manhattan no longer held the same attraction.

According to Census Bureau estimates, after reaching a peak of 39.6 million in January 2020, California lost 600,000 people as of July 2022. Most of this loss occurred during the first year of the pandemic, as residents sought out more affordable living options in other states.

The number of residents moving to other states reached its highest level during the pandemic, while international migration fell to its lowest level in decades. This meant those areas that previously benefited from international migration (like California and New York) no longer received that same population influx.

In contrast, states such as Texas, Florida, Arizona, Nevada, Idaho, Utah, and South Carolina experienced the most population growth during the pandemic. These states offer a combination of lower housing costs, lower income taxes, and an overall lower cost of living, making them attractive destinations for those looking to escape the high housing prices and crowded cities of California and New York.

The housing market during COVID

The housing market during the pandemic was no longer an environment where major metropolitan markets shone but instead saw tertiary and secondary cities experience astronomical growth.

Economic stimulus and the COVID housing market

The COVID-19 pandemic has brought unprecedented challenges to the global economy, with many businesses struggling to stay afloat and keep staff employed. During the pandemic, government financial assistance profoundly impacted household incomes and supported housing demand.

As a result, households could maintain their economic status in April 2020 when unemployment was at an alarming seasonally adjusted 14.8%, up from 4.4% the prior month.

Federal Reserve was also a key player in implementing economic stimulus measures to combat the pandemic-induced recession. One such measure was to maintain record-low rates in order to encourage borrowing and spending, ultimately having a significant impact on the housing market.

Low mortgage interest rates made it more affordable for people to purchase homes and for businesses to invest in new properties or expand their existing ones. Initially, low rates helped keep the property market buoyant during economic uncertainty, and then they helped fuel the subsequent years of unprecedented home price appreciation.

In July 2020, the mortgage rate fell below 3% for the first time, but it didn’t stop there. Mortgage rates would continue dropping, hitting an all-time low of 2.65% in January 2021. The average mortgage rate for the year was 2.96%, making it an incredibly affordable time for homebuyers and those looking to refinance their existing mortgages.

These low rates were a direct result of the Federal Reserve’s policy of maintaining record-low rates to stimulate the economy during the COVID-19 pandemic.

Unfortunately, low rates come with negatives as much as positives. First, they become addicting to consumers. However, low interest rates were designed to support the economy during an economic black sheep event. These measures were never meant to last, and interest rates were always expected to go up back up.

Unfortunately, buyers quickly become used to affordable debt, and then when rates begin to rise, they react negatively and pull away from the market. Furthermore, low-interest rates contribute to inflation, which became the next hurdle in the post-pandemic housing market.

The lack of new housing holds up housing prices.

Under normal circumstances, increased demand for new housing is met by increased construction.

But with pandemic conditions, broken supply chains, and social distancing requirements, new construction was limited. These restrictions

The strongest real estate markets during COVID.

Throughout the COVID pandemic, most housing markets saw considerable growth, even if they were only driven by inflation.

However, some markets performed better than others, and those markets surprised many of us. Some of the strongest housing markets during the pandemic included:

  • Phoenix, AZ
  • Tampa, FL
  • Miami, FL
  • Boise, Idaho
  • Charlotte, NC
  • Sacramento, CA
  • Austin, TX

But don’t be fooled, double-digit price growth happened in most major markets. According to CoreLogic, the median US home price rose a whopping 18.1% in 2021. December saw Phoenix, Tampa, and Miami achieve remarkable success as they topped the annual price index of 20 cities.

Not only did these metropolitan areas lead the way with year-on-year growths of 32.5%, 29.4%, and 27.3%, but this is also the 31st consecutive month that Phoenix has held its position at number one.

COVID, inflation, and the housing market.

Low interest rates, broken supply chains, high business costs, and a labor shortage have been the primary drivers of high inflation experienced during 2021 and 2022. High inflation leads to a decrease in purchasing power, meaning that money loses its value in buying goods or services.

If you ask prominent economists, there’s nothing more dangerous to the US economy than high inflation. The Federal Reserve Bank has a “healthy” inflation target of 2%, but in 2021 the Consumer Price Index (the inflation indicator) climbed 7%, which meant that inflation was quickly running out of control.

The Fed was left with only one option, to start raising interest rates. Since the start of 2022, we’ve watched interest rates steadily increase. Throughout the year, the Fed increased interest rates seven times and will continue raising interest rates in 2023 until inflation is back under control. Currently, the US inflation rate is at 6.2%, down from a high of 9.1% in June 2022.

Where is the Fed’s rate now?

With inflation remaining stubborn, the Fed followed through with its promised rate hike at its February 2023 meeting. The fed funds rate by 25bps to 4.5%-4.75%, which is the highest its rate has been since 2007. The stock market was the first to react to the Fed’s rate hikes, but now we are seeing housing prices adjust and cool.

What buyers, sellers, investors, and real estate professionals need to remember is that while these rates may seem high, we have yet to hit the average Federal funds rate for the past 50 years. 

The average rate from 1971 until 2023 is 5.42%, with the record high hitting 20.0% in March 1980.

The housing market after COVID

If you feel you’re suffering from housing market whiplash, you’re not alone. In just over 12 months, we’ve transitioned from one of the most profitable years in real estate to an entirely new and unknown climate. Housing stock for both purchase and rent is limited, and the fear of job loss lingers in the air.

Now that interest rates are high, the housing market has entered a cooling phase. Many potential homebuyers and investors are taking a step back from purchasing and hoping that housing prices or interest rates will drop.

However, demand for existing homes is resilient. Therefore, in the short term, we don’t expect home prices to drop, especially in metro areas with a high population density or growing industry.

Housing demand is way down, but so is inventory.

Lending standards are making it increasingly challenging for buyers to qualify for the same loan amounts they could qualify for a year ago. However, buyers expecting housing prices to react immediately will be left disappointed.

New and secondary home inventory across most major markets is down. For example, Phoenix, which had the strongest residential market in 2021, has seen home sales drop 48.7% year-over-year, and price growth is down 1.4%. In December 2022, 1,245 homes sold, down from 2,428 in 2021.

While homes are staying on the market longer, they are still selling. What’s hindering this market most is that there just aren’t enough homes being listed for sale, contributing to a revived housing affordability crisis.

The post-pandemic stalemate.

The best way to describe the current market conditions is that of a stalemate. Those buyers who are in the market feel pressured by a lack of supply and options. They are still willing to purchase a property but are hindered by not being able to find the kind of properties they want.

Meanwhile, potential sellers are incredibly wary of the market. They are aware of the less-than-desirable lending conditions, and many realize that if they were to sell, they’d likely be forced into a mortgage at a much higher interest rate than their current loan.

Home builders aren’t building.

To help the housing affordability crisis, we need new homes – both single-family homes and multifamily. Unfortunately, home builders are also withdrawing from the market, further exacerbating the lack of inventory.

In December 2022, applications for building permits declined by 6.5% from the previous month. Builders are also subject to interest rates, both in financing their developments and through buyer demand.

Therefore, they are afraid to start new housing projects in the current market climate and are instead responding by decreasing production. As a result, the overall housing market after COVID has reached unchartered territory.

With high interest rates, low inventory, and a lack of housing starts, it’s looking like buyers and sellers will remain in this stalemate for some time to come.

Based on new housing expectations and the lack of seller participation in the market, experts have a gloomy outlook for housing inventory levels. That means housing prices may stay relatively flat while housing demand remains low. This will continue to impact the housing market until inventory levels start to rise again.

To make informed decisions, buyers, sellers, and investors should consult with real estate professionals to understand how current conditions are impacting the housing market in their local area.

If you aren’t already working with a local agent, FastExpert can help you connect with top real estate agents who will help you navigate the post-pandemic housing market.

Here’s the bright side of the post-pandemic housing market.

Despite the high cost of debt, short-term housing prices aren’t expected to tumble or experience any huge drop due to sound economic fundamentals, continued high levels of employment, and inventory restrictions. We could say that while we are in a period of uncertainty, the market is also starting to “normalize” again.

But remember, every market is unique. Some areas will see house prices immediately drop while others will continue growing. Moreover, real estate is an asset class that tends to appreciate in alignment with the consumer price index, so expect many markets (especially mid-sized metro areas) to remain resilient, at least in the short term.

The top growth markets for 2023 will surprise you.

If you want a definitive answer for the best housing markets in 2023, that will greatly depend on the economist and the statistics they focus on. However, if we are purely focusing on growth, the top real estate markets will also be some of the country’s most affordable markets.

Lower housing prices mean that high-interest rates have less impact on monthly payments. Investors who want strong cash flow and appreciation should look toward Grand Rapids (MI), Toledo (OH), and Augusta (GA). These are lower-cost areas that are expected to experience continued home price appreciation.

Expensive cities (like San Francisco) and those that had rapidly rising housing prices during the pandemic (like Salt Lake City) will likely have the biggest price corrections.

So, while housing prices aren’t expected to experience an extreme tumble like back in 2007-2008, the housing market after COVID is uncharted territory that will bring opportunity and surprises.

The residential market remains unpredictable, and inventory levels are expected to stay low for the time being. Therefore, it’s a good time for buyers and sellers to do their homework before jumping into any housing decisions. 

Despite all that, there may be a silver lining, with potential growth promising in more affordable real estate markets. Therefore, it’s essential to monitor the housing market trends and work closely with experienced agents who can help identify which markets will be best suited for you and your property needs.

Keep up with current economic expectations, pay attention to local housing data, and ensure that you are well-informed before making any housing decisions.

When is the best time to buy after COVID?

If you’re ready to buy a home, the best time to buy is when you find a home that meets your budget and requirements.

Single-family homes remain in high demand, and many markets are expected to keep appreciating in 2023.

Trying to time the market or waiting for mortgage rates to return to pre-pandemic levels will likely result in you missing out on the right property or just a higher purchase price.

Connect with a local real estate agent with FastExpert to learn more about your local market.

Kelsey Heath

Kelsey Heath is a real estate content specialist with an extensive background in residential, industrial, and commercial property. She has been involved in the industry for a decade as a professional and personal investor, gaining a deep understanding of the market and trends. With a passion for written communication, Kelsey loves helping people understand the sometimes-complicated concepts behind real estate and is now a sought-out guest and ghostwriter.

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