Anyone hoping that our current economic chaos would be deals in the housing market have thus far been disappointed. In May, the median listing price in the United States was up 1.4 percent year-over-year, according to Realtor.com. Existing home sales in April fell by almost 18 percent, but prices rose 7.4 percent compared to a year ago.

Why aren’t home prices coming down?

Home prices have been pushed up over the last 5 years by high demand created by a then-booming economy and a low supply of housing for sale, due in part to relatively low levels of housing construction and available land on which to build.

After the outbreak of the pandemic, housing demand fell as buyers lost their jobs, part of their income, or simply didn’t want to be shopping for a house in the middle of a viral outbreak. Demand dropping was evident in a number of metrics. Although a weak indicator of buyer demand, traffic to real estate portals like Zillow and Redfin dropped significant in the beginning of the outbreak, as did more reliable indicators like pending home sales and weekly mortgage applications.

Usually, a huge drop in demand would put downward pressure on prices; home sellers would be competing with each other to attract a limited number of buyers by dropping their asking price. But while housing demand has dropped substantially, housing supply also dropped in lockstep as potential home sellers pulled out of the market for many of the same reasons buyers are.

New home listings is a good indicator of housing supply, and after stay-at-home orders were enacted, new home listings cratered by as much as 80 percent year-over-year. Redfin reported that 41 percent of offers were subject to a bidding war over the last month, suggesting demand is outpacing supply—just as it was before the pandemic.

While both supply and demand have dropped, the relationship between the two went largely unchanged, meaning the drops in supply and demand were generally proportional to each other. Furthermore, home sales also dropped after the pandemic hit, and it’s hard for prices to move when there aren’t as many housing transactions to make prices move in aggregate. Together, this leaves prices much where they were before the pandemic.

This is consistent with how housing markets have fared in previous pandemics. A Zillow study looked at housing markets in cities hit by previous pandemics in Asia and found that whole activity dropped, home prices didn’t move much. A good way to think about the housing market at this moment is that it’s on pause—buyers and sellers have left the market, transactions have dropped in response, and prices aren’t moving.

 

While the current conditions haven’t led to a short-term price drop, the long-term economic trends induced will likely affect prices in the future.

There are faint signals that housing markets are slowly building back up. Demand metrics like mortgage applications are up, and pending home sales have returned close to their normal in cities less impacted by the pandemic.

However, pending home sales in cities hit hardest on the coasts remain down significantly year-over-year. And markets across the country remain supply constrained, as new home listings remain down year-over-year even in cities that haven’t been hit has hard by the pandemic.

 

(Published in Curbed)