Tens of thousands of buyers dove into the housing market this spring and summer even as the coronavirus upended the U.S. economy. The presence of these buyers, plus a sharp drop in the numbers of homes on the market, drove home prices to record highs in most parts of the United States, according to an analysis of housing price data by The Associated Press and Core Logic.
The average home price in the U.S. in May rose 4.2% compared to a year ago. The data shows that prices for cheaper homes — those found in the lower third of prices in metropolitan areas and a typical target for first-time buyers — grew faster than the rest of the market, rising 6.7% from a year ago.
The coronavirus pandemic helped shape the housing market by influencing everything from the direction of mortgage rates to the inventory of homes on the market to the types of homes in demand and the desired locations.
The pandemic pushed the U.S. economy into a deep recession as many businesses shut down, which in turn forced the hand of the Federal Reserve to dramatically lower interest rates. The average mortgage rate fell from around 3.75% at the beginning of the year to under 3% in a matter of weeks after the pandemic struck the U.S.
That sudden drop in mortgage rates was an instant boon to home affordability, economists said, allowing many buyers to afford much more expensive homes while keeping the same monthly payments.
“A 0.75 percentage point drop may not seem like a lot, but it’s like handing $40,000 to a buyer of a $475,000 home, who is able to get more house for the same monthly payment,” said Taylor Marr, senior economist at Redfin.
Like nearly every other industry, real estate came to a halt in March when the country’s governors put stay-at-home orders in place. But once those orders were lifted, buyers who were intent on buying in 2020 before the pandemic came back in the market, realtors said.
The boost in home affordability likely played a part in driving up prices for starter homes, or those priced in the lower third of the market.
In Washington, DC, real estate agent Sandy Shimono said most of the activity in the last three months has been for homes between $400,000 and $650,000, which in the expensive DC metro area are considered starter homes.
“Many are tired of renting and finally home affordability seems to be a reachable goal,” Shimono said.
It’s too early to tell whether an exodus from cities to the suburbs will be long-lasting. Many employers have told employees to expect to work remotely until early 2021, with some companies now talking about at least some work done remotely indefinitely.
The pandemic has also temporarily changed the type of homes in demand. Families are looking for homes with rooms, especially if children may be doing remote learning for the foreseeable future.
There are some threats to the housing market’s resilience, however.
Home prices have been rising while the nation is in the grips of a deep recession. Many protections put into place in the early days of the pandemic are now coming to an end – evictions are starting back up, and foreclosures are likely to follow. Enhanced unemployment benefits have also expired, with unemployed workers left to hope Congress can reach an agreement to extend them.
With less protection, and the certainty of the pandemic lasting the rest of the year, potentially thousands of homeowners could fall behind on payments and have their homes foreclosed upon. A sudden rush of supply could dampen home prices in the second half of the year.