The abrupt economic downtown created by the COVID-19 pandemic is doing something to the Valley housing market that hasn’t occurred for months – driving up the inventory of homes for sale.
But with unemployment rising in the wake of the coronavirus, that likely won’t be great news from anyone’s standpoint as sellers may not be finding as strong an appetite to buy a home as there had been only a matter of weeks ago.
Fears of close physical contact with strangers shared by sellers and buyers – combined with potential buyers’ concerns for their own financial health – are throwing water, at least for a while, on what had been one of the nation’s hottest housing markets, experts say.
The abruptness of the reversal in the market’s fortunes has been as stunning as that of the overall economic downtown, one expert noted.
“The speed of change is as high as we have ever seen,” remarked the Cromford Report, which closely studies the Valley’s housing market.
Until businesses started closing as the result of social-distancing directives over the last two weeks, the housing market posed a steadily rosier picture for sellers and a spiraling grimmer outlook for buyers.
Home values continued to increase while available homes – particularly those around $250,000 to $300,000 – were nonexistent in some ZIP codes, including in Mesa.
But now, a different picture is emerging.
The early warning signs that the COVID-19 pandemic would impact the housing market came during the first week of March, when Cromford predicted that high-dollar house sales would ebb.
It said in early March that while transactions for homes at prices of $1 million or more had increased in February by 56 percent over February 2019, the trend was likely to hit a wall.
“With the recent negative developments in the markets for stocks and commodities, we would anticipate the demand for homes over $1,000,000 to be less impressive when we look at numbers for the next few months,” it said.
Meanwhile, buyers of more modest means found greater frustration as the month began: data for February showed closings on homes up to $250,000 were down almost 19 percent from February 2019. Sales of homes between $250,000 and $500,000 increased last month by 26.5 percent over February 2019 while closings on homes between $500,000 and $1 million were up 26.5 percent, Cromford said.
The bottom line, it added: “The supply situation is even more extreme than last month. Rapidly rising prices have done little to dampen demand.”
Conversely, it said, “sellers are still gaining negotiation power in 14 out of 17” communities – including Mesa.
But what a difference a pandemic makes.
Cromford last week was far more pessimistic about the Phoenix metro housing market overall – even as it reported that the available housing stock suddenly began increasing.
For those who are still in the market, it said, the inventory of homes for sale is loosening – with the overall number of available houses increasing by 27 percent Valley-wide in four weeks over last year at this time. In the week of March 12, it added, Mesa’s inventory shot up 19 percent – the third highest increase among 17 Valley cities and the second highest, behind Gilbert, in the Southeast Valley.
“Of course,” Cromford added, “we were starting from an excruciatingly low inventory of active listings between $150,000 and $300,000, so it is not hard to see a high percentage increase from such an abnormally low base.”
By Friday, Cromford stressed that while it’s far too early to predict the virus’ impact on the housing market, it was obviously cooling down as supply increased and demand began dropping.
Zillow also noted changes, citing an abrupt increase in mortgage rates and Bank of America’s downgrading of some major homebuilders – “suggesting the bank believes COVID-19 will harm consumer sentiment and slow home building.”
If that happens, it could put the brakes on a a frenzy of home construction in the Valley, which experts say has hit a record high, given the number of building permits issued last month alone.
Attention also turned toward foreclosures down the road as unemployment spirals. Zillow Economist Jeff Tucker said, “The big question at the moment is to what degree measures being taken by local, state and national legislators will help limit the number of foreclosures in the months ahead.”
Among the factors driving the inventory increase is the virtual collapse of the tourism and hospitality industry – which has pretty much wrecked, at least for now, vacation rentals, Cromford said.
Homeowners who only last month were enjoying the additional money they were making through Airbnb are quickly deciding it might be a better idea to put that same house up for sale before things get any worse, Cromford indicated.
Moreover, it noted, “A huge amount of wealth has been destroyed on the stock market in the last month as the indexes return to 2016 levels. This leaves cash in short supply and some owners may need to turn fixed assets in liquid assets at short notice.”
Social distancing also is playing a role, the report said, explaining:
“Few normal buyers are willing to make an offer without viewing a property, though some investors may be tempted. …Buying and selling, as well as construction are likely to drop sharply, especially if a close-down is ordered by government, as it has in several states.
“In fact, I am surprised that showings remain as high as they do. Some people are clearly not taking the pandemic seriously enough, which is a big mistake that will cause the virus to spread more quickly and incur a higher mortality rate.”
Cromford and Zillow stressed that homeowners, for now, don’t have to worry that the rapid changes are affecting home values – which have hit almost unprecedented levels over the past year.
“During the outbreak, there is little reason to suppose that house values will be significantly affected, up or down,” Cromford theorized, stressing it was hard to predict what will happen because the virus itself is unpredictable.
“We will not know where we stand until the virus is peaked and the economy is well on the road to recovery,” it said.
But, it added, “sales volumes will inevitably collapse for a while until the outbreak dies down. It will not even be possible to calculate meaningful home price numbers if there are too few closed sales to measure effectively.
That volume of sales activity will depend on the duration of lockdowns – especially if they increase in severity.
“Real estate activity will be increasingly limited, causing volumes to drop,” Cromford observed. “How far and fast they drop in Arizona will depend on decisions made at the state and county government levels.”
“It is possible that sales will cease closing if title companies and/or county recorder offices are temporarily closed,” it added, warning:
“The impact of COVID-19 on the housing market has been relatively mild so far, but it is likely to become more dramatic over the next few months.
The virus hit just as inventory inched up after months of shrinking.
At the beginning of March, Cromford noted, “New listings are still arriving more slowly than normal and year-to-date we have experienced a shortfall of 10 percent compared to 2019. Supply continues to fall quickly across most of the market.”
The report had noted prices “have not risen nearly enough to have any effect so far” on demand. Now, it said, “the housing market has reacted to what is happening” as “a powerful upward trend transformed into a sharp downward trend.”