Home Prices vs. COVID-19: Will They Go Up or Down?

Posted on May 7th, 2020

It’s time to take a look at how COVID-19 could impact home prices given the massive disruption to the local, state, national, and global economy.

On the one hand, inflation is expected due to all the government spending, which could lead to a price increase since real estate often acts as an inflation hedge.

Conversely, if tons of borrowers lose their homes due to unemployment, we could see properties flood the market. And when combined with fewer eligible buyers, it could lead to a supply glut.

Consider the Lack of Housing Supply and Mortgage Quality

  • The housing market has three great things working in its favor right now
  • Housing supply is low enough even if buyer demand wavers during this uncertain time
  • The quality of today’s mortgages is excellent any many homeowners have lots of equity
  • Mortgage rates are at record lows, which further increases home buyer appetite

First, let’s compare today’s housing market to the one in 2006. They really couldn’t be any different, both from an inventory standpoint and from a mortgage perspective.

Simply put, back then there were way too many homes being built, and not enough demand to meet that supply.

At the same time, banks and lenders were doling out home loans to anyone with a pulse, knowing they could quickly bundle the underlying mortgages and sell them to Wall Street shortly after origination.

Taken together, it was a recipe for disaster. Homeowners had massive mortgages they couldn’t truly afford that were often set to adjust higher just months after they took them out.

They also had no skin in the game, aka home equity, so there wasn’t much incentive to stick around and try in vain to keep a sinking ship afloat.

Today, Americans are sitting on the most home equity in history, and very little of it is being tapped thanks to tighter underwriting guidelines that have only become more restrictive since COVID-19 reared its ugly head.

Meanwhile, there’s an inventory shortage that has likely only worsened as fewer existing homeowners list their properties, and mortgage rates are at record lows.

In short, homeowners today have tons of equity and historically cheap mortgages, and home buyers have fewer properties to choose from and ridiculously low mortgage rates at their disposal.

The Great Unknown Ahead

  • Ultimately nobody knows what the future holds or how we recover post-coronavirus
  • 1 in 5 Americans have already filed for first-time unemployment benefits since mid-March
  • That will likely worsen over time and lead to increased mortgage forbearance requests
  • The big question – is this income hit temporary for most homeowners or permanent?

Now it’s wonderful that today’s mortgages are mostly pristine, and that homeowners have tons of equity to serve as a cushion if forced to sell.

But we’re living in a very fluid and strange environment at the moment that could change in no time at all.

For example, one in five Americans have filed for unemployment since mid-March, and that’s likely only going to get worse.

So even if many of these homeowners had super affordable mortgages, a lack of income and the inability to tap their equity could put them at risk quickly.

To counter that we’ve got the mortgage forbearance offered via the CARES Act, which is great for struggling homeowners but only lasts for 12 months.

What happens after that? At best, if they simply have to resume making normal payments, there’s a decent chance not everyone will be re-employed and able to do so.

The world has changed and may not go back to “normal,” and thus not everyone will have the realistic ability to return to making monthly mortgage payments.

Even if they’re offered a loan modification to lower their payment, it still might not be enough if they can’t find work.

The same goes for investment properties such as those offered by Airbnb and other short-term vacation companies, or kiddie condos owned by parents in college towns, which might remain vacant.

If this is the case, we could see a flood of new properties hit the market similar to what we saw back in 2008, 2009, etc.

That’s where these two very different housing markets could begin to intersect. The good news is we didn’t have a supply glut before COVID-19 came around.

Back in 2006, we had a massive oversupply that was further exacerbated by a financial bubble, so it was a one-two punch.

Additionally, one could argue that both homeowners and lenders were to blame for what happened back then.

Sure, lenders offered high-risk products, but borrowers happily pulled out billions in cash out along the way to spend on who knows what.

Today, you can’t really blame a homeowner who is unable to make their mortgage payment due to the coronavirus epidemic.

And it’d look really bad to foreclose on this type of homeowner, which could limit the damage and keep inventory tight.

But here’s the thing – no one can sit here today and say they know what’s going to happen with COVID-19. And data models can’t forecast properly in this environment.

So really anything right now is a guess.

What Are We Seeing So Far in the Housing Market?

homebuyer demand

  • Home sellers mostly haven’t budged on listing prices
  • Prospective sellers are ready to go once stay-at-home orders are lifted
  • Amenities like big yards and home offices are becoming more important to buyers
  • Home buying demand is recovering and listing prices are up from a year ago

Everyone seems to want to call this event temporary – a moment in time that will magically fix itself once the economy opens up.

I don’t subscribe to that, as much as I wish it were true. You can’t simply erase what’s happened the past several months, nor what lies ahead in the aftermath.

Speaking of, are we even “after” yet, or is this still in the early innings. While that too can be debated all day long, again no one really knows.

But we can look at early impact to get some sort of a clue.

The MBA reported that seasonally adjusted home purchase applications increased 6% from a week earlier, with even bigger gains seen in California and New York.

The ever-cheerful National Association of Realtors reported that home sellers have not lowered their listing prices as a result of COVID-19.

In the latest week, 73% of Realtors said their clients did not reduce listing prices to attract home buyers.

That’s been pretty steady for the past few weeks since NAR began reporting on it.

Additionally, they said today that 77% of prospective sellers “are preparing to sell their homes following the end of stay-at-home orders.”

In other words, once this blows over it’s going to be real estate business as usual, sans discount!

Interestingly, buyer needs might have changed – they now want a big backyard to play in and grow their own food, along with a home office and possibly a home gym too.

The less is more thing may no longer be a hot trend, nor is urban living possibly as popular. The Burbs are back!

Over at Redfin, it’s also good news with nearly 53,000 homes hitting the market during the week ending April 24th, compared to just over 48,000 for the week ended April 13th.

Additionally, pending home sales have increased from less than 31,000 to more than 32,500 during those same periods.

Despite the rise in new listings, there were less than 700,000 homes for sale in Redfin markets nationwide, the lowest amount the real estate brokerage has seen during the past five years.

That might explain why the median listing price was $308,000 for the week ending April 24th, up 1% compared to the same period last year.

Home buyer demand has also begun to climb back after taking a hit in March, a sign potential buyers are unfazed and ready to move forward.

A Home Price Projection from Zillow

Zillow scenarios

  • Company sees home prices falling just 2-3% by the end of 2020
  • With a recovery in home prices throughout 2021
  • Their pessimistic model sees a 3-4% decline in prices and no recovery in 2021
  • Home sales are expected to fall 50-60% in all their models before rebounding at varying speeds

Now let’s take a look at a projection from Zillow, the creator of the Zestimate that should know a thing or two about home prices.

They have forecast a mere 2-3% drop in home prices through the end of 2020, which will be followed by a recovery in prices throughout 2021.

That means a small drop this year that is recovered next year could mean no material change for home prices due to COVID-19.

So they appear to be on the “this is temporary” wagon. Prior to the coronavirus outbreak, home prices were expected to rise 3.3% on average in 2020, and 2.7% in 2021, per the Zillow Home Price Expectations Survey, which includes a panel of more than 100 economists and experts.

But again, their “proprietary macroeconomic and housing data” might not be well-equipped to take into account a pandemic.

They have three different scenarios for home prices, including an optimistic, medium, and pessimistic outlook.

At best, they drop only 1-2% this year, at worse they fall 3-4% and “remain depressed through 2021.”

In all cases, home sales are expected to take a big hit of 50-60%, though when they recover varies.

That might hurt real estate agents and mortgage lenders if mortgage refinance volume begins to waver.

The good news, despite all the horrible news, is that homeowners are a lot better off today than they were in 2006, which means more of them should be able to get through this crisis without losing their home.

And that should bode well for home prices.

Source: thetruthaboutmortgage.com

How Long Does It Take to Afford a Down Payment in Each State?

The traditional American dream typically begins with great jobs, two kids, and a family home to grow in. If you’ve been dreaming of buying a house, then you’ve likely considered the financial factors, including saving and budgeting for the home. Just as America is huge and diverse, so is its housing market. 

The average home price in America is $270,726, which may be startling to homeowners in West Virginia, where the average home value is just $107,840. On the other end of the spectrum, families in Washington, D.C. can expect to pay over $700,000 for a home. There are huge differences in both income and housing costs across the country, which is why we set out to see just how long it would take to afford a home in each state. 

If you’re looking to buy your first home, then you already know you have to save for a down payment. We recommend you have 20 percent of the home’s value as a down payment — be sure to save extra for closing costs. Otherwise, it’s important to choose a home and mortgage that keep your monthly payments within 30 percent of your income to best manage your living expenses.

We used the above budgeting parameters to determine how long it will take to save for a down payment and also cover home affordability in your city so you can better plan your home purchase. 

Here’s what we found:

  • On average, it takes an estimated 51 months, or 4.25 years, for an American household to save for a 20 percent down payment. 
  • $54,145 is the average 20 percent deposit on a single-family home in America. 
  • It would take an estimated 109 months, or 9 years, to save for a 20 percent deposit on a home in Hawaii — the longest amount of time of all U.S. states.
  • West Virginia homebuyers can save for a down payment in the least amount of time — approximately 29 months. 

How Long Until You Can Afford a Down Payment?

The cost of living and home prices in a given area are heavily correlated, which is why location has such a large influence on your housing prices.

Home prices respond to supply and demand just as other financial assets and costs do. When more people can afford homes, the price rises with the competition among potential homeowners. 

Alternatively, when fewer people can afford homes, then the competition is between sellers, and they’ll drop their prices to get the home sold quickly. 

States Where Saving for a Down Payment is Slowest

High costs of living may leave little room for savings while requiring a larger down payment to begin with. It’s no surprise that the states we found to take the longest to save are also the most expensive to live in.

1. Hawaii

Hawaii’s islands offer tropical paradise, but that comes with a hefty price tag. When you consider the logistics of shipping materials and belongings to the island, the limited residential space, and the desirability of real estate as a whole, it’s no surprise that Hawaii has the second-highest median home value in the U.S. at $727,391. If you’re looking to buy a home in Hawaii you’ll need to save about $145,000 for a down payment, which will take an estimated nine years of saving. 

While the homes are expensive, rent in Hawaii will only save you about $500 a month — which is why homeownership is still more popular in the Aloha state than renting. 

2. Washington D.C.

The District of Columbia tops our list of having the most valuable homes, beating out Hawaii by just over $10,000. While the homes cost more, households also make more with a median income of $85,203 each year. Saving for a down payment will take you 104 months, just short of nine years, to save the $148,000 you’ll likely need for a deposit. 

3. California

California takes third place on our list with a nearly $140,000 drop in median home value, while bringing home a median income of $75,277 a year. It will still take you an estimated 94 months to save for a $117,610 deposit. This is in part because 54 percent of California households own their homes, making it a more competitive market despite the healthier income-to-home value ratio.

States Where Saving for a Down Payment is Fastest

Rural states tend to have less densely populated cities and more land available than popular coastal cities, which is why the cost of owning a home in these states can drop hundreds of thousands of dollars on average.

1. West Virginia

The mountain state of West Virginia has the lowest median home value at $106,840, as well as the lowest median household income at $44,097. Still, you’ll only need to save for 29 months to cover the approximate $21,368 down deposit. This is a huge contrast from their pricier neighbor Washington, D.C., and the savings may even be worth commuting out of state. It’s no wonder that nearly 73 percent of households here own their homes. 

2. Oklahoma

Oklahoma and Iowa actually tie for second place, each taking just 31 months to save for a 20 percent down payment. Oklahoma nudges ahead with cheaper home prices around $134,995 and a suggested $27,000 deposit. 

3. Iowa

Further north in Iowa, you can still expect to save for your home in under three years, but you’ll be putting nearly $4,500 more down. The good news is that you also likely make about $8,000 more than the median household in Oklahoma. That increased earning may be why 72 percent of homes in Iowa are owner-occupied. 

Home Affordability in the U.S. 

After looking at home affordability on a state level, we wanted to focus on cities to find those most and least friendly to homebuyers looking to stretch their dollar. Using data from the National Association of Realtors, we pulled the most and least affordable home rates in each region. Here are the cities that made the list:

Tips to Save for a Down Payment

There are a few things you can do to ensure your financial stability when you decide you’re ready to become a homeowner. In many ways, you can save money owning a home over renting, but it’s costly upfront and you’ll have to consider maintenance, too. The more you plan now, the less you’ll have to worry about mortgage forbearance, or worse, foreclosure. 

  • Review your budget to determine how much you can afford to pay on housing each month — ideally less than 30 percent of your monthly income. 
  • Determine your housing needs so you know how much your ideal home may cost for accurate planning.
  • Begin saving up to 20 percent of your budget, but don’t cut your retirement or rainy day savings. 
  • Start a side hustle to earn extra money and fast-track your savings goals. 
  • Improve your credit score to lower your mortgage rates and improve your chances of approval. 

Owning your own home is a great investment for your finances and your future, but it’s not without risk. A 20 percent down payment is one of the best ways to ensure you get a great deal on your home and maintain affordable mortgage payments. 

A robust down payment is an essential step in any financially responsible homeowner’s journey, but you still need to ensure your monthly mortgage payments will be affordable. Once you begin saving your down payment, consider how much you can afford to pay, what the average interest rates are in your area, and how much your preferred home style will cost to determine how much home you can afford


To determine how long it would take to save for a 20 percent deposit on a home, we used median household income data from the U.S. Census (2018) to determine how much someone could reasonably save each month (20 percent of their income). We then compared that savings amount to the median value of a single-family home for each state, provided by Zillow.

Sources: Census 1 | Census 2NAR Realtor | Zillow | Move | World Population Review

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