The U.S. real estate market today is strong – very strong – despite the impacts one would expect from the COVID-19 pandemic. In fact, in some senses, the pandemic has contributed to the market heating we’ve seen.
The scarcity of inventory that helped drive up home prices and rates of appreciation over the past several years has since been compounded by the increasing migratory trends associated with COVID; namely, homeowners moving from dense urban city-centers to the suburbs and even to more distant, less populated geographical areas across the country.
This has resulted in trends similar to those historically seen among ultra-competitive coastal area real estate markets manifesting in inland markets in many areas of the country.
Often, we see major markets located along the coasts see strong upward price movement in times of economic growth and then react with more volatility to macroeconomic headwinds. Meanwhile, we expect interior markets to have steadier and more gradual year-over-year appreciation, with more muted dips during recessionary periods.
In the below chart, you can see a striking illustration to how coastal areas fluctuate in median real estate price. The fall from the Great Recession in 2008 is clearly seen, along with larger swings upwards during the periods prior to and during the recovery from that crash.
If we drill down closer into the data from the early- to mid-nineties, we can see another relatively large dip in price quite clearly in Los Angeles (though not as stark as what happened in 2008). This boom-and-bust, which corresponded to a smaller – though still quite impactful – recessionary period, shows just how susceptible coastal markets, especially in California, are to larger economic forces.
These markets tend to see strong growth during times of prosperity for several reasons, including chronically limited inventory due to inherent geographical constraints, more complex regulatory environments which cause extended development timelines and, often, competition from foreign investors.
In contrast, the interior of the country has historically seen more stable growth due to more sheer acreage to develop for housing, laxer regulatory processes in regards to real estate and a generally smaller influence of outside investment.
For example, consider the below figure, which includes some major inland metro areas like Pittsburgh, Des Moines and Charlotte.
However – as this chart plainly shows – despite these differences, we are starting to see some of these inland markets begin to behave similarly to their coastal counterparts in terms of median home price gains.
Over the past several years – marked by low volumes of listed inventory – areas such as Charlotte and San Antonio have seen large jumps in single-family home (SFH) prices, which have represented an outsized growth relative to what would be historically expected. In the months since the onset of the pandemic this trend has only accelerated.
We see these large climbs in inland areas for a few reasons beyond the limited inventory which has been driving appreciation for some years now.
First, which has been noted extensively on this blog, is the sudden desire for larger homes in less dense markets by U.S. buyers facing a largely airborne virus and the indefinite nature of remote work and school. We have also seen more than a dozen moves to record-breaking low rates set by the Federal Reserve in hopes of stimulating an abruptly paralyzed American economy which have increased consumers’ buying power and, in turn, contributed to driving up home prices.
There are a few red flags that should be noted and watched in the coming months regarding these home price trends. For one, the inventory problem that has caused much of the pricing upswings in some interior markets may very well reverse course soon. There is a risk of overdevelopment in some areas, including the major inland markets that we see represented in the above chart.
Coastal areas, constricted as always by the factors detailed earlier, will likely continue to see prices increase (but at a slower rate) outside of a serious and widespread recession. Given the significantly bifurcated recovery underway – with high-end earners seeing very little impact from the COVID-recession, while lower-end earners continue to struggle – and the generally expensive nature of coastal homes, any decrease or leveling out will likely be more akin to that seen in the early 90s, rather than that in 2008.
We also should keep an eye on the expiration of forbearance plans under the CARES Act, which will be reaching its first anniversary on March 18, 2021. There are millions of homeowners currently in forbearance across the country who will lose those protections throughout next year and – depending upon their ability to return to performing status – who may find themselves facing foreclosure. This is of course assuming a Biden administration doesn’t extend the moratoriums currently in place.
Regardless, we may very well see a meaningful increase in the number of homes listed for sale as these borrowers choose to sell at what is arguably an intermediate top in the market and downsize to more affordable homes rather than face foreclosure. Such a rapid increase in inventory could ultimately result in downward pressure on home prices. Combined with overbuilding of new housing units, this could create a situation not unlike that seen following the housing crash in 2007-2008, which took many years to resolve itself, and where we saw inland U.S. real estate market prices move sideways for an extended period of time.
While there are still too many uncertain factors at play to outright declare a real estate bubble, we do see the potential for correction in markets both inland and coastal. It’s a critical situation that will require highly accurate data and experienced insight to analyze in the coming months. At Black Knight, we are equipped with both, and will closely monitor the situation, reporting our findings here on this blog as they become available.
Using its Daily Home Price Flash, Black Knight’s Collateral Analytics analyzes home sales and pricing information for major U.S. markets on a bimonthly basis and publishes its findings on this blog.