The world at large has seen more change, more upheaval over the past two years than at any time since perhaps the 1940s. Two years ago, no one could have anticipated the enormous, world-wide tragedy of the pandemic and resulting pivot in priorities—with real estate marked by both new trends and an acceleration of existing ones. After four major waves of the virus and some fundamental changes to how agents and brokers approach their craft, looking back on the world as it was in early 2020 is almost a surreal experience.
Contrasting these two different worlds, the most pertinent question for those with an eye on the future is how to identify the signs of real change compared to the violent—and temporary—fluctuations of a global crisis. Knowing the difference will be vital for anyone who hopes to stay ahead of the curve in their real estate ventures going forward.
Real Change: Consumer Behavior
In early 2020, a luxury real estate report by Coldwell Banker found two of the top needs for buyers were home office/flex rooms in a home, and outdoor amenities or living space—two things many pundits have attributed to the pandemic.
But this, like many other apparent shifts in what homebuyers and sellers are reacting to and looking for, clearly was accelerated by the pandemic, not caused by it, and promises to continue long after COVID stops being the main disruption in people’s lives.
According to the most recent National Association of REALTORS® (NAR) Profile of Homebuyers and Sellers, 85% of buyers purchased single-family detached homes. That number has been steadily increasing, from 79% in 2013 to 83% in 2017, as even before the pandemic buyers preferred the larger traditional single-family lot for homeownership as opposed to sharing a duplex or townhome. The need for more space was actually more commonly cited as a reason for moving a decade ago—19% of buyers in 2009 were upsizing—compared to 2021, when only 14% cited too little space as their impetus.
Rob Dietz, chief economist for the National Association of Home Builders (NAHB) says that recent data examining preferences in remodels indicates more space will be a longer-term trend, however.
“I think that lasts, and that it’s going to boost home size,” he says.
Danielle Hale, realtor.com®’s chief economist, agrees and says that so-called “flex space” that can be used for home office, home gyms or other less traditional purposes will remain a permanent expectation for buyers.
“People might be a little bit more focused on getting that and making that one of their must-haves versus areas that they will compromise on,” she says.
Anyone who already owned a home during the pandemic will be especially set on those spaces, she projects, understanding their importance.
As far as other trends associated with the pandemic, relocating to be nearer to friends and family increased in importance for buyers, but that has fluctuated over the years as well, listed as a primary reason for moving by 37% of people in 2009, rising to 43% in 2015 before falling to 41% in 2019, according to NAR data. Other preferences—most notably “convenience to job”—had been on similar tracks, with that cited by 52% of people in an NAR survey in 2015 but only 46% in 2019, meaning other factors have pushed buyers to care less about their commute besides the pandemic.
On the seller side, jobs have also slowly been losing their importance. In 2009, 21% of sellers were moving for a job relocation, while only 11% cited this reason a decade later in 2019—a number that held steady in 2021.
Hale says these trends are not dependent on the pandemic either and will continue in the same direction, though some of the more dramatic projections some have attached to this—a collapse of big metro markets or a sudden shift to rural living—are not realistic.
“In our data it seems to have created some flexibility,” she says. “Commutes are a bit less of a concern…the majority of the time, that’s going to mean moving from the big city downtown urban area to the suburbs [of the same metro].”
Fluctuation: Inventory
One of the biggest crises of the real estate market over the last 12-24 months is the severe shortage of housing inventory, which drove prices up at a dizzying speed and sidelined many potential buyers. This is also a trend that predated the pandemic—according to the National Association of Home Builders (NAHB), existing home inventory hit an all-time low in December of 2019. New housing starts had somewhat flatlined after clawing back from the Great Recession, increasing by about 100,000 units every year between 2011 and 2014, but only by about 29,000 on average between 2016 and 2019.
Overall, active home listings also fell steadily in the years preceding the pandemic, according to data from realtor.com, from about 1.55 million in June of 2016 to about 1.35 million in June of 2019.
A lack of inventory was already one of the leading concerns for the real estate market before the pandemic, with an estimated 2.5 million additional homes needed back at the beginning of 2020 to meet the much-lower demand, according to Freddie Mac report. Simply going back to the way things were will not be enough, though recent data has been encouraging, with 2021 seeing a staggering 15.6% increase in new housing starts.
But though this is also another trend that was only accelerated and not created by COVID, it is not likely to continue in the long term as buyer demand wanes, existing homes start to enter the market, and technology allows fast and cheaper home construction. Exactly how long that takes is unclear, but the seller’s market of today is not a new normal in the medium-term.
Redfin’s Homebuyer Demand Index, which measures homebuyer activity like requests for home tours and other inquiries, reached an all-time high in November of 2021. The number of homes sold within two weeks rose from just over 40% in May of 2019 to 55% the same month in 2021. In July of 2021, 55% of homes sold for above asking price compared to just 25% in July 2019 before the pandemic.
This kind of reckless demand, characterized by bidding wars and increased competition from institutional investors, is simply not sustainable, and eventually, as the supply chain normalizes, more homes will come onto the market—though whether this will actually result in real balance after years of under-building remains uncertain despite recent positive signs from the building sector.
There are signs demand is leveling off, as Fannie Mae’s measure of homebuying optimism—called the Home Purchase Sentiment Index—fell to its lowest level since May of 2020 this month with only 25% of people surveyed saying it is currently a good time to buy a home.
Many buyers will simply miss out on homeownership as interest rates have already begun ticking up, Dietz says, and while that is unfortunate, it will likely push demand down in the near term.
Hale adds there is “definitely a longer tale here” based on the tremendous lack of inventory, and that new construction alone won’t alleviate the imbalance. But as the pandemic winds down, she posits that existing homeowners will start to cash in and sell their homes, which is likely to alleviate some of the pressure that has been such a headache for buyers.
According to Dietz, about 33% of homes on the market today are new construction, versus around 10% pre-pandemic. That means there is a lot of room for existing stock to fill the demand, especially as that demand slows somewhat.
In the longer term, the market may not even need what was traditionally seen as a healthy supply of inventory, he posits—six months, as the wisdom has been. Four to five months of inventory might be plenty because homes can be built faster with new technology, and the entire buying and selling process has also accelerated.
“We’re going to have greater and more rapid turnover,” he says.
Real Change: Affordability
With home prices soaring by almost 20% across the board as housing became the hottest commodity of the pandemic, it is hard not to see a silver lining in the unprecedented pandemic real estate market. But at the same time, NAR and other experts warn that the current path for affordable housing is unsustainable, and that spiraling price appreciation has many dangers if housing becomes unaffordable.
This trend is not new at all. Going all the way back to 1960, home prices have risen 121% while incomes have only gone up 29% according to the Economic Policy Institute. The number of households that are “cost burdened”—spending at least 30% of income on direct housing costs—increased steadily from 2001 to 2016, with renters bearing the brunt. That has made it harder for many, particularly low and middle-income rental households, to rise to the dream of homeownership. The situation is even worse for historically disadvantaged groups, with Black homeownership rates up only fractionally since landmark Civil Rights victories of the late 1960s, who also continue to face significant disctimination in the homebuying process.
There is unlikely to be any single or simple solution to affordability. Federal legislation to address affordable housing has stalled in congress. Different regions also have their own disparate challenges, from land cost to environmental concerns. The short answer to the affordability crisis is that there is no short answer, and very likely the pandemic has pushed that even further.
Nadia Evangelou, senior economist for NAR, recently led a study that connected inventory to the crisis in affordability, showing that middle-income families have increasingly fallen out of homeownership opportunities. She adds that without the right kind of focus, buying a home will become more and more inaccessible to the average consumer.
“There are fewer entry-level homes entering the market. If we don’t see more entry-level homes…homeownership for these income groups will be more difficult,” she says.
But entry-level homes are not being built, and likely won’t be built under the current market conditions, according to Dietz. As interest rates rise, people at those marginal income levels—households somewhere in the range of $50,000 to $100,000—will be unable to afford a home, and construction targeted at that group becomes an untenable risk for builders.
“From a builder perspective, that’s the market that not only is the most challenging from a construction cost side to add supply, but now it has the most demand-side risk as well in a higher mortgage interest rate environment,” he warns.
Hale says there needs to be a “dramatic shift” in everything from labor costs to zoning to the overall regulatory environment in order to reverse this trend. Simply building slightly more densely through an increased reliance on townhomes or accessory dwelling units (ADUs) could help to some degree, but will not be enough.
“It’s still difficult to do in most areas,” she says.
The consequences of long-term unaffordability cannot be overstated. Evangelou points out that as rents also rise, even more people will be pushed off the margins of homeownership, unable to save for down payments, and will also be unable to pass on wealth to their children, further shrinking the market for homes.
Jordan Levine, chief economist and vice president for the California Association of REALTORS® says that a “smaller basket” of real estate supply limited to upper income levels or stratified regionally makes any downturn or shock a much bigger problem for the whole economy.
“When a smaller and smaller slice of the population is the one supporting the housing market, that creates inherent challenges, and should be a big motivator for us to address our big challenges,” he says.
Fluctuation: Migration
People fleeing coastal markets and big cities because suddenly they were able to work from anywhere is another one of the enduring images coming out of the pandemic. Remote work has often been portrayed as a seismic shift that will forever alter how people choose to live, making geography essentially a non-factor in real estate.
That is not true now, and will likely become even less true in the long-term, according to Dietz and Hale. In fact, according to census data, less people fled cities in 2020 than on average, and there was no significant uptick in people migrating to suburban areas. The proportion of people moving to a different state did go up slightly, however—by one-tenth of a percent in 2021—and the percentage of people staying in the same county dropped from 5.9% to 4.9% between 2019 and 2021.
The distance people have moved has increased marginally, with a median move of 11 miles in 2013 compared to 15 miles in 2021. Also defying perception, the median age of sellers remained roughly the same between 2019 and 2021, meaning Boomers—who typically move further when they buy a new home—were still well-represented in pandemic-era moves.
The types of markets that people have been moving to—smaller cities in the Midwest and South—did see a marked increase in people moving there, according to NAR data. But Evagenlou says that context is important, and that these in-migration patterns are strongly correlated with local job opportunities and were almost all hot markets before the pandemic, meaning most people are not actually just picking up and moving wherever they feel like.
Dietz says NAHB has projected that around 40% of workers will end up in a “3-2-2” work model—three days in the office, two from home and two days off. The more important trend to look at is the broader regional movements, with decades of growth in Southern cities like Dallas and Houston in Texas, and places in the Midwest like Des Moines, Iowa and Columbus, Ohio.
“These cities have relatively better housing affordability and maybe a higher quality of life,” he says. “It’s not going to be as strong as 2020.”
“I do think the data suggests that we saw a shift in people’s willingness to move further away,” says Hale. “If not long term then at least temporarily. I think sometimes margin cases can attract an outsized share of media attention.”
Inter-state moves are happening and will happen, according to Hale, but simply not to the degree many thought, and not enough to upend the industry. More flexibility can help stabilize the overall real estate market, though it’s not clear how large the impact of that will be.
“It can rebalance population and population growth, so it can create inventory in markets that have been extraordinarily tight,” Hale explains. “[But] the reverse can be true, we can see prices bid up and time on market drop in some of these markets that have been ‘relief markets’ from high-cost areas.”
Evangelou says a motivating factor for recent migrations has been the so-called “Great Resignation,” and she attributes some of the migration patterns to people moving for new jobs—which may be remote, hybrid or fully in-person, but still have caused the individual or family to pick up and live in a new place.
“People moved during the pandemic, they were working remotely,” she says. “Now they are going back to the big city because they found a job.”
When the labor market normalizes so will migration patterns, all other factors being equal. This is likely to hold true generally for other migration-related pandemic disruptions, according to Hale, and trends that will last are the ones that were already well understood before the pandemic.
“If you look at the overall population of movers, people who are moving aren’t moving very far,” Hale says.
Jesse Williams is RISMedia’s associate online editor. Email him with your real estate news ideas at jwilliams@rismedia.com.
