Part 2: How coronavirus reshapes local residential real estate
Steve Poltorzycki, an Arlington resident writes about what he sells -- local real estate. This column updates his fact-based views of the pandemic-affected market. Read his early April column >>
Last month, my newsletter discussed the impact of Covid-19 on the residential real estate market during the last two weeks of March. The story then was that new listings were down (compared to the same time period last year), sales were still solid (a large number of buyers were still shopping) and the real estate industry had adapted its processes for transactions so as to conduct them in a safe manner.
This report provides an update on the real estate market situation based on data from April, the first full month of experience living under Covid-19 based restrictions. In sum, April was very much like the last two weeks of March.
First, a couple of caveats. While the data presented in this newsletter show the situation in a number of the towns in which I work, the focus of the discussion will be on the data relating to Massachusetts as a whole. In many cases, town-specific data represent too small a sample size from which to draw meaningful conclusions.
Further, rapid change in response to Covid-19 sometimes brings new developments daily, so the information presented here is simply my best understanding at the time of this newsletter (May 10, 2020). Please feel free to contact me at the email address at the bottom of this newsletter if you would like an update on any specific item.
Less inventory, higher prices
Spring is usually the busiest time of year for the real estate market, but Covid-19 has changed that.
The number of homes newly coming on market (new listings) during April 2020 was down 50 percent compared to April 2019. New listings allow the supply of homes on market to be replenished, so if new listings go down, so does the inventory available to buyers. Also, there was a significant increase in the number of homes being withdrawn from the market, which further contributed to tighter inventory.
As a result of the drop in supply, fewer homes went under agreement this past April than during the same period last year (down 49 percent). However, the number of sales (measured by closings) didn't drop nearly as much, reflecting the closing of deals started in early March before Covid-19 related restrictions were in effect and also continued solid interest by buyers in the market.
The high level of buyer interest is underscored by the 22-percent decrease in days to offer. Homes sold faster this April than they did last April. Buyers are eager to buy, and particularly at the lower end of the market multiple offer situations are still quite common.
Reduced supply and continued strong buyer demand resulted in prices continuing to rise (up 11 percent over last April). Buyer demand was further fueled by historically low mortgage interest rates (3.13 percent for a 30-year fixed rate mortgage, the lowest since 1971, which is as far back as Freddie Mac publishes interest rate data).
The sector has adapted to the new reality. In person open houses have either been dramatically curtailed or eliminated altogether, with virtual live open houses or recorded video tours taking their place. In person showings are still taking place, but potential buyers are being screened for both financial viability (with sellers requiring very recently issued pre-approval letters) and for Covid-19 risk. Strict limitations are being imposed on the number of buyers allowed in a house and those that are allowed in are required to wear protective masks, gloves, and booties. The drive-by appraisal has become the norm. And closings are being conducted under social distancing restrictions.
Supply is shrinking
The pace of new listings coming on market in Massachusetts during April 2020 dropped by 50 percent versus April 2019. Some sellers are understandably reluctant to put their homes on the market. They don't want buyers coming into their homes, potentially bringing infection with them. And there's increased uncertainty about whether a buyer who has a job today will still have one by the time the closing rolls around. On top of that, sellers need somewhere to move to after they sell and may be reluctant to engage in house hunting right now. So a good chunk of potential sellers have decided to hunker down until the crisis is past.
But there are also quite a few sellers who are either in a must sell situation or see decreased competition from other homes on the market as an opportunity to realize a higher price. These are the sellers who are listing their homes and finding a market for them.
In March, sellers who already had homes on the market when the pandemic crisis began to heat up faced the decision whether to keep their homes on the market. A number of those sellers took their homes off the market. This trend continued in April, but at a slower pace. Whereas March 2020 saw a 121 percent increase over March 2019 in single family listings (and 184-percent increase in condos) being withdrawn from market, in April 2020 the single family rate of withdrawals dropped to 51 percent and condos dropped to 64 percent. That's still a lot, but the decrease in the rate of listing withdrawals/cancellations suggests that sellers are becoming more comfortable with keeping their homes on the market right now.
Buyers keep buying
No doubt sellers who have withdrawn their homes from the market will be looking to put their homes back on the market once the pandemic is behind us and buyer confidence returns. This will provide some of the supply that will be needed to meet the pent-up buyer demand.
Supply is diminishing, but what about demand? The number of single family homes sold (closings) in Massachusetts during April 2020 dropped 14 percent versus April 2019. And condo closings dropped by 23 percent. That's down somewhat, but still a strong rate of sales given the reduction in inventory.
But closings are a lagging measure of demand, as closings usually happen four to six weeks after an offer has been accepted. Closings are more a measure of what demand was about a month ago.
A more current measure of demand is the number of properties that go under agreement. Properties typically go under agreement a week or so after an offer has been accepted.
There was a 49-percent drop in April 2020 single family homes going under agreement versus April 2019. For condos there was a 25 percent drop. That's a significant amount, but almost directly tracks the decrease in number of new listings. Less supply means fewer deals.
In these circumstances, by far the best measure of buyer demand is days to offer. The greater the demand, the quicker properties sell.
Days to offer (DTO) for single family homes dropped from 50 DTO in April 2019 to 39 DTO in April 2020, a 22 percent decrease. And condos dropped from 41 DTO to 35 DTO, a 15-percent decrease.
This measure of demand and reports from real estate agents that multiple offers for a given property continue to be common, particularly for lower priced properties, makes clear that buyer demand continues to be very strong, as it has been for the last several years.
It takes some time before changes in supply or demand are reflected in house prices. Like data associated with closings, house prices are a lagging indicator of the current situation, reflecting agreements made between sellers and buyers four to six weeks before closing. But sales prices are still an indication of what the fundamentals of the real estate market were before the current health crisis, and therefore what the market could revert to once the crisis is past.
Prices keep going up
Massachusetts single-family median prices in April 2020 were up an average of $45,000 over April 2019, an 11 percent increase, and condo prices were up $52,500 over 2019, a 14 percent increase. This is a very strong price rise, among the highest rate of rise in recent years. When supply decreases and buyer demand stays strong, prices go up.
Despite the factors keeping some buyers hunkered down waiting things out, there are still plenty of buyers out there who want to buy a house, and with inventory tight right now, it stands to reason that prices will either hold level or keep going up.
Mortgage rates at all-time low, yet hard to get
Buyers demand has been amped up by the extremely low interest rates now available for mortgages. According to Freddie Mac, the average 30-year fixed mortgage rate at the end of April was 3.13 percent, the lowest rate in the 49 years that Freddie Mac has been collecting and sharing mortgage data.
While the historic low mortgage rates are good news for buyers, the not so good news is that mortgages can be harder to obtain. Lenders are concerned about the economic prospects of potential borrowers and the uncertainty posed by the potential for loan forbearance. As a result, many lenders have put in place tougher credit score requirements, are checking job status of applicants much more frequently, are increasing reserve requirements (the minimum amount of cash borrowers need to have left after they close), are jacking up interest rates for certain types of loans, and are deferring rate locks. Practices vary among lenders, so it pays to shop around not just for the best rate, but for the optimum set of eligibility requirements that best suit the borrower's situation.
Transactions mostly virtual
I detailed in last month's newsletter the steps the real estate sector has taken to ensure the safety of all parties to a real estate transaction.
In some towns in person open houses have been banned, and in towns where they are permissible they take place following state-mandated social-distancing rules. That said, most large real estate firms have discontinued in person open houses and moved to live virtual open houses (the listing agent shows the house via Zoom or similar video communication platform, answering questions real time) or prerecorded video tours.
In-person private showings have become more restrictive, with sellers limiting access to the house to decision-makers only, and then only after receiving a pre-approval letter, and in some cases a filled out questionnaire aimed at determining Covid-19 risk. Visitors must wear protective equipment (mask, booties, gloves).
It has not become unusual for sellers to move out of a house to make it easier to sell. A vacant house minimizes risk for buyers and virtually eliminates risk for sellers.
Home inspections are still taking place following sensible precautions, including appropriate personal protective gear, having only the buyer present for the inspection (if at all), and maintaining social distancing.
Bank appraisals are being performed largely via drive by, with physical inspection of the interior of the house more the exception than the rule.
The need for interpersonal interactions during a closing have been pared down to the absolute minimum and much of the closing can take place remotely.
Thoughts for sellers
It's understandable if potential sellers want to wait until the pandemic is more under control before they put their homes on the market.
But sellers should understand that it's perfectly feasible to sell right now. Procedures have been put in place by the real estate sector to address safety concerns. Serious, well-qualified buyers are looking for houses and entering into deals. And there's less competition in terms other houses coming on market, so buyers have less to choose from.
And if a potential seller would prefer to wait there is a middle course. Take all the steps needed to prepare a home for sale right now so that when things open up you can be as fast out of the gate as possible beating the competition by a crucial two or three weeks while a host of buyers come into the market looking to satisfy their pent up demand. That means taking steps such as completing those projects that will most improve the appearance and marketability of the house, de-cluttering, staging, and getting professional photographs and videos of the property.
Thoughts for buyers
As with sellers, there are some buyers who would prefer to wait, and of course that's perfectly understandable.
But potential buyers may want to keep a few things in mind about the market right now. The sellers who have kept their homes on the market or who have recently listed are motivated to sell. There are deals to be had. And mortgages can be obtained at the lowest rates they have been at in over 50 years. If a buyer has confidence in his or her job security, from a financial point of view right now is a great time to buy.
When things open up there's a good chance there will be circus-like feel to the market. While it's possible that prices might soften as new listings flood the market, it's also possible that lots more buyers will be back in the hunt, maintaining prices at current levels or even driving prices up. Buyers who have been keeping tabs on the market by participating in virtual open houses, taking video tours, cleaning up their credit scores and making sure they are well-qualified for mortgages will be that much further ahead of the competition when they are ready to buy.
Data were collected from MLS PIN, National Association of Realtors, Massachusetts Association of Realtors, Great Boston Association of Realtors,US Bureau of Labor Statistics (BLS), US Bureau of Economic Analysis (BEA), Freddie Mac, and Conference Board Consumer Confidence Survey. Data do not reflect private transactions. Berkshire Hathaway Home Services Commonwealth Real Estate and its sales agents make no representation as to the accuracy of the data and are not responsible for any actions taken as a result of use of or reliance on this information.
This column of information by Steve Poltorzycki was published Monday, May 11, 2020. He is a Realtor with Berkshire Hathaway HomeServices Commonwealth Real Estate. Email him at steve at stevepolt.com if you would like to receive his real estate newsletter and see his website >>
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