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By Alexander
Hermann on Oct 19, 2020 08:00 am
Innovations in
the ways people search for, purchase, and finance homes have helped
fuel a dramatic rebound in US housing markets. When the COVID-19
pandemic shuttered much of the national economy in the spring, there
was a sharp drop in home sales across the country as real estate
offices closed temporarily and home showings were cancelled. But
homebuying bounced back considerably over the summer. One reason for
the resurgence has been homebuyers and sellers alike adapting to
changing circumstance and the adoption of innovative homebuying
processes, including virtual showings, appraisals, and closings.
These innovations have significantly streamlined the homebuying
process and have the potential to disrupt housing markets into the
future.
The drop in
home sales in the spring had little precedent. On a month-over-month
basis, existing home sales declined nearly 18 percent in April from
the prior month, the third largest such decline since 1999. Compared
to the prior year, existing home sales were down 27 percent in May,
at a seasonally adjusted annual rate of 3.91 million units (Figure 1).
Likewise, new home sales were down 13 percent annually in March and
14 percent in April.
Figure 1:
Home Sales Nationally Plummeted in the Spring of 2020 Before
Rebounding to New Cycle Highs Over the Summer
Note: Home
sales are shown at the Seasonally Adjusted Annual Rate.
Source: JCHS tabulations of US Census Bureau, New Residential Sales;
National Association of Realtors, Existing Home Sales.
But housing
roared back late in the summer. August was the strongest month for
home sales since 2006. Fully 6.0 million existing homes were sold at
a seasonally adjusted annual rate according to the latest data, 10
percent above levels from 2019, despite the inventory of homes for
sale tightening significantly. New home sales in August were up fully
43 percent at an annual rate of 1.0 million units, again the
strongest recording since 2006.
The strength
of the for-sale housing market in recent months is attributable to
several possible factors. For one, ongoing demographic shifts—namely
the continued aging of millennials into peak homebuying years—have
also been an important tailwind. As a result, the share of first-time
homebuyers ticked up in the summer, reaching 35 percent in
June after averaging 29-32 percent from 2012 through the first two
months of 2020.
The pandemic
itself has also likely spurred some increased activity. Indeed,
interest rates declined to historic lows as the US entered recession.
Moreover, some of the millions of Americans suddenly working from
home are likely reevaluating their housing needs, especially in terms
of space, location, and affordability. Also, while the economic
fallout from the pandemic has been widespread, job losses and income
disruptions have been less common among higher-income households—those
most likely to own and purchase homes. Lastly, in a typical year,
homebuying peaks in the spring before it tails off later in the
summer and declines in the fall and winter. By shuttering markets,
the pandemic may have simply delayed some homebuying activity until
later in the year.
But homebuyers
and sellers also quickly adapted to new circumstances, and their
behavioral shifts played a role in the rebound. For example,
according to a National Association of
Realtors (NAR) survey of over 3,000 realtors in May, 92
percent reported seeing behavior changes among sellers with active
listings, and 76 percent reported changing behaviors among buyers
when entering a home, including the use of hand sanitizer, masks, and
handwashing. While it’s impossible to say how lasting these shifts
will be, it’s likely that these behavioral changes persisted into the
summer months and helped stabilize the housing market.
The rebound
was also facilitated by changes in the homebuying process offered by
key institutional actors—including realtors, lenders, and
appraisers—that were quickly adopted by buyers and sellers. These
changes include increased use of online searches and virtual
showings, appraisals, and loan closings. In the same NAR survey, 35
percent of realtors in May reported sellers relying on virtual tours
and 26 percent on virtual showings. Moreover, according to Zillow’s 2020
Urban-Suburban Market Report, site traffic for for-sale
listings rose 42 percent year-over-year in June. This speaks to
persistent demand for homeownership but also a growing preference for
online searches that began before the pandemic but have since become
more commonplace. In a 2019 report, NAR identified
that 44 percent of homebuyers—a sizable plurality—began their housing
search by looking at properties online, more than double the rate who
contacted a real estate agent (17 percent) and quadruple the rate who
looked online for information about the homebuying process (11
percent).
Similar
innovations have occurred to allow more expedient loan closings and
appraisals. Before the pandemic, home closings often involved
face-to-face contact with a realtor, lawyer, and notary, among
others. But in late March, the Federal Housing
Finance Agency (FHFA) provided greater flexibility for homebuyers
through alternative appraisal methods, including virtual and
exterior-only appraisals for both purchase and refinance loans. The
same FHFA guidelines also allowed remote online notarization in at
least 45 states plus Washington DC.
The long-term
impacts on the homebuying process are still to be determined, but the
pandemic could accelerate a trend towards increased digitization and
use of technology in homebuying. Perhaps the most extreme form of
this in recent years has been the use of iBuyers, technology-based
firms that offer cash to home sellers before quickly reselling the
property at a markup. iBuyers, which include Opendoor, Offerpad, and
Zillow Offers, use algorithm-driven
automated valuation models to determine the value of the
home and ultimately the offer price. By foregoing the extra cash that
would come from traditional marketing, sellers benefit from not
having to make repairs to the home as well as the certainty and
brevity of the transaction. While iBuying has the potential to
disrupt the market, CoreLogic estimated that
iBuyers accounted for only about 1 percent of home sales
in the markets they operated in, in 2018. iBuyers were most common in
markets with relatively new, standardized housing stocks, comprising
as much as 5 percent of transactions in the city of Phoenix, 3
percent in Las Vegas, and 3 percent in Raleigh. iBuyers had almost no
presence in the Northeast and very little, outside Minneapolis, in
the Midwest.
The pandemic
has certainly spurred adaptations and innovations in the homebuying
and selling space. Whether these changes prove long lasting will
depend on how much they improve the experience for buyers and
sellers, their adoption by industry, and, in some cases, changes to
policy that would enable and encourage their continued use.
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