COVID 19 and its Impact on Housing and Digital innovation

As best said by Charles Dickens, for US housing - It was the best of times. It was the worst of times. COVID 19 is having positive impacts on the housing market for owners and much of the industry that is well positioned to capitalize on the opportunity. But it is also having potentially catastrophic impacts for some homeowners, middle to lower income renters and the landlords who rent to them. COVID 19 has been accelerating trends that have been in progress for years as well as potentially breaking some long standing paradigms. I’ll highlight each of the trends I’m following in turn:

Increased Demand for Homes, Particularly in Suburban and Rural Areas.

Home sales have jumped during the pandemic fueled by low interest rates and the long-awaited move of the millennial generation into homebuying, spurred by the sudden need for space. For higher income renters whose incomes were not impacted by COVID 19, they were suddenly freed from a burdensome and expensive commute and flush with cash from cancelled social and travel plans. Sitting in small spaces in cities that they were unable to enjoy was the nudge they needed to buy homes in the suburbs or even in other metro areas entirely.

Additionally, there was an increased demand for vacation homes and second "optional" homes, as vacations in far off locations were cancelled. Housing is one of the few COVID economic bright spots.

Increasing Unaffordability for Those Not in Yet Homes

Home prices, already out of reach for many American families continued their climb upward as housing supply was unable to keep pace with demand due to:

• Increased demand for housing (see above)

• Further constraints to supply as people in homes largely stayed put , and

• Even steeper increases in costs to build new housing as increases in lumber prices and other COVID 19 supply chain and labor challenges have further affected the cost and time to build homes

For many working-class families, who may have experienced an income drop due to COVID 19, they are watching the American Dream grow further and further from their grasp.

Money Saving Opportunities to Refinance for Homeowners

With lower interest rates and home equity levels relatively high, homeowners are able to reap the benefit of refinancing. This caused record volume for mortgage originators who needed to meet these volumes with a remote workforce and new processes. Just like in the retail sector where the digital native retailers, like Amazon have benefited at the expense of the retailers more reliant on in person traffic, this boom has continued the trend driving customers to lenders with more digital capabilities.

Remote Work, School, and Everything Else Has Broken the Axiom That the Only Thing That Matters in Real Estate is Location, Location, Location

Long possible with technology, the US has been slowly increasing its ability and tendency to work from home. But COVID 19 broke whatever remaining biases and obstacles all in one week in March, with some of the Impact expected to be long term. Housing value has long been known by the axiom Location, Location, Location. But suddenly the axiom was Space, Space, Space – the space for home gyms, home schools, and home offices. This broke the arc of two long standing trends:

• The open floor concept that works well for parties and evenings at home became a nightmare for people trying to create quiet private space for meetings.

• Similarly, the trend toward urban centers was halted as people suddenly longed for the space and private spaces in suburbs and rural areas.

In addition to home purchases by owners in nearby suburban and rural areas, this Wall Street Journal article, How Airbnb Pulled Back From the Brink shows how short term rentals have also increased in these areas. Of course real estate investors have begun to follow suit as detailed in this article in Auction Distressed Property Demand Accelerates in Suburban and Rural Areas as longer term rental demand in these areas are also likely to rise.

Whether this is the start of a long term trend driven by the capability to work anywhere with digital technology or a short term change driven by the pandemic temporarily reducing the allure of the city with its restaurants and other amenities remains to be seen.

Changing Household Composition

The American household, particularly in the suburbs, has long been envisioned to be a family comprised of two adults and school age children. Prior to COVD 19, we were seeing more seniors aging in place. Additionally, we were seeing trends toward multi-generational households driven by numerous factors including, increased longevity, immigration trends from countries where intergenerational housing is common, and housing affordability. These trends have also accelerated in COVID 19 as having an older generation available to watch children home from school while parents work from home has become a necessity and senior living facilities have, at least in the short term, lost some of their luster.

Pricing out Middle to Lower Income Renters

Middle to lower income renters who are disproportionately in the service and retail sector were the most likely group to experience a drop in earnings and since those jobs were not premised to work remotely were less able to continue to earn wages from another location. These are the people most prone to a potential eviction crisis, and potentially homelessness, without new Federal stimulus. Similarly, the landlords that rent to this community, often smaller landlords, are similarly struggling with rent non-payment.

There are several potential outcomes:

• Federal stimulus and other incentives or a quick post Covid 19 economic recovery stave off the worst-case scenario and working-class families continue to navigate the high-priced housing market as best they can while we return to a status quo.

• Stimulus money to cities and people is either not forthcoming or insufficient to stave off a spiral of cities running out of money and reduced services just in time for an increased homeless population. This may also force many owners of currently affordable housing into financial distress or incenting them to sell the properties, which in turn may lead toward either urban decay or further gentrification as those properties are redeveloped

• Cities and municipalities have access to sufficient Federal infrastructure stimulus funds and have the opportunity to use this moment to repurpose land from less needed office space and invest in affordable housing creating both a job stimulus, solving a long-term need, and potentially investing in historically underserved communities

Increased Process Digitization

The front end of both the home searching and initial mortgage steps were already digital. However, suddenly digitization of the full end to end process was essential, new processes became digitized, for example:

• Touring homes

• Digitization of appraisals and closings

• Regulatory bodies needed to find ways to audit without being on site

These were already long-term trends that became necessities all in one day in March of 2020.

Bill Gates famously said that we overestimate the change that can happen in a year, but underestimate the change that can happen in 10 years. COVID 19 has accelerated that cycle so that the change has happened in one year.

What do you anticipate the long term impacts of COVID 19 will be on housing?

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Article by Ann Epstein