How will Coronavirus affect the Pacific Beach real estate market?

With vacation homes empty, long term tenants and homeowners becoming unemployed, will Pacific Beach home prices plummet because of Coronavirus?

Or, will residential real estate – one of the few human necessities (shelter, and now work space) – have an increase in demand?

In this article I will discuss my thoughts on how Coronavirus, and it’s affect on the economy, will affect the Pacific Beach residential real estate market in the near future.

Summary:

Pacific Beach home prices will decrease, not right away, but in the near future
Homes will take longer to sell
More inventory will be available on the market
Fewer buyers will be able to buy a home, or get a home loan

If you disagree, agree, or have a question, please leave a comment below.

Before getting into the details of my prediction, you might want to read about:

How quickly can real estate prices change?

Real Estate is not as liquid as other assets, like stocks.

We saw stock prices take a significant hit over several days in March, losing around 25-30% in a week.

Real Estate takes around 30 days to get into escrow (matching a seller with a buyer), and then another 30-45 days to complete the sale.

Because of this, prices negotiated a month or so ago, are finally “closing escrow” now.

To help us think about this more, here are some cause and effect timelines:

Stock prices are effected by buyers and sellers reacting to information shared every second, and can find matching buyers/sellers within seconds.
Real estate prices are effected by micro and macro economic factors smoothed out over months or quarters.
Global warming is an effect caused by many factors over years
Evolution is an effect caused by factors over generations.

Will the Pacific Beach residential real estate market be affected by Coronavirus?

To simplify the situation, let’s say there are three options for the Pacific Beach real estate market:

Prices go up
Prices stay the same
Prices go down

Will Pacific Beach home prices stay the same?

In the very short term, prices will be relatively similar. Home sales from early March to mid April have shown that. Remember (from above) home prices can take a while to change.

? RECENT PACIFIC BEACH REAL ESTATE MARKET NUMBERS :

PRICE: In the last year (4/15/2019 to 4/15/2020), the median sales price for houses was: $1,355,000. For condos, $600,444.

In the last 2 months (2/15/2020 to 4/15/2020) the median sales price for houses was $1,297,000 and $550,000 for condos.

In the last month (3/15/2020 to 4-15-2020) the median sales price for houses was $1,500,000 and $575,000 for condos.

Please note several things for last month’s numbers:

This last month is a small sample size.
These prices were (most likely) negotiated before Coronavirus hit.
Agents sometimes take days or weeks to mark their listing as “sold”, so we are most likely missing some data (like from a home that sold today, 4/15/2020).

VOLUME: In the last year, 200 houses sold in Pacific Beach. An average of about 17 sales per month. 256 condos have sold in the same period (21 per month).

In the last two months, 24 houses (12 per month) and 44 condos (22 per month) sold in Pacific Beach.

In the last month, 11 houses and 18 condos sold in Pacific Beach.

The numbers above show that prices are similar, and volume has taken a bit of a hit, but not too bad considering some agents may still have to mark their listing as sold from the last month.

Considering this is spring, and homes sales volume should be slightly higher than the yearly average, the most noticeable change here, is a potential decline in sales volume. This will be interesting to watch over the next months.

It’s important to understand that issues that are going on now (quarantine), will affect prices over the next several months, and may not be seen right away.

The tangibility and liquidity of real estate makes it relatively stable.

People need somewhere to sleep at night.
Transactions take a while to complete, so “comparable sales” will take months to show up on the charts, and then affect future pricing.

In theory, it’s possible for the stock market to go down 25% and then back up 25% in a span of a week, and for the real estate market to remain the same. The change in other assets (equities) might not last long enough to affect real estate prices.

? Numbers that are more predictive of the future:

The chart above is a larger sample size (includes houses, condos, townhomes, twinhomes and rowhomes – effectively all residential classes).

Homes listed shows the total number of homes that came on to the market during that time period, divided by the number of months. These are “new listings” per month, which shows us an average of how many Sellers are entering the market.

Homes opening escrow, means that a seller accepted an offer from a buyer. This number is the total number of homes that went “off market” and resulted in a sale, or is still in escrow. We then divided this total number, by number of months, to get an average number of escrows per month.

Homes sold, means that escrow closed – the sale completed. This number shows the total number of sales divided by the number of months, to reach an average number of sales per month.

These numbers show us that on average (and rounded to whole numbers for simplicity), over the last year:

48 sellers entered the market each month.
42 homes went into escrow each month.
41 homes sold each month.

Over the last 2 months:

61 sellers entered the market each month.
28 homes went into escrow each month.
37.5 homes sold each month.

Over the last month:

57 sellers entered the market.
15 homes went into escrow.
31 homes sold.

From this we can see a few significant changes:

Over the last month, there has been a significant drop in the number of new escrows.
Over the last two months, we are seeing more sellers enter the market than average (could be due to seasonality).
Number of sales seems to be decreasing, slightly.

The most concerning stat, is that in the last month, only 15 homes went into escrow. This means that next month’s sales numbers will be really low (probably around 15 homes sold).

To compare with 2019’s numbers, which adjust for ‘seasonality’, there were 52 new escrows that opened between 3/16/2019 and 4/16/2019.

15 vs 52. Yikes!

This makes sense. Less people are out home shopping. Less people have jobs. I would expect these trends to continue for the next 2-6 months (maybe longer depending on length of quarantine).

Will Pacific Beach home prices go up or down?

We discussed how real estate supply and demand work in another blog post.

If we expect a decrease in supply, and/or an increase in demand, prices will go up.

If we expect an increase in supply, and/or a decrease in demand, prices will go down.

The supply of residential real estate (number of Sellers) can change due to several things:

People need to move and they need cash to buy something else.
People are forced to sell due to cash flow issues – property is losing money, owners cant pay their mortgage etc. . .
People who want to sell because they are tired of owning real estate – bad tenants – moving away and don’t want to deal with it, etc. . .

I am expecting the number of Sellers to increase. Here’s why:

Home owners that need to sell in order to allocate funds somewhere else:

Home owners may need to re-fi or sell to get money out of their home to pay for essentials like business expenses, food or healthcare. While housing is essential, holding onto the equity is not.

With changes in employment, there will be a large number of people that need to move for new jobs. Most homeowners will need to sell their home in order to buy a new one, or to rent a home and move to a new location.

Home owners that are forced to sell due to financial reasons:

People pay their housing expenses with income or savings.

The relatively large amount of vacation homes in Pacific Beach (approximately 44%!) creates a cash flow issue for many owners.

While there are government backed programs that allow a delay in rent or mortgage payments due to COVID-19, the fact that people are not vacationing means that this income is gone for short term rentals.

Long term tenants affected by Coronavirus are expected to pay their landlord at a later date, if they cant make payments now.

Home owners are expected to pay their mortgage at a later date.

Short term tenants aren’t booking vacations, and thus are not going to pay their landlords at a later date. That income is GONE.

Some vacation home owners will be forced to sell if their property is bleeding money every month.

Along with vacation homes being a popular business in Pacific Beach, there are many other businesses and employees which have lost income.

Frankly, any small business that survives Coronavirus and quarantine is a miracle.

Similar to how real estate has been in a “Seller’s market” for most of the last decade, the job market will shift from an employee’s market to an employer’s market.

Wages will be lower, and more part-time/freelance work will be common.

The $1,200 stimulus check will help. The delay in housing payments will help. The access to working capital for businesses will help. But when the bills add up, there will most likely be a number of people that will need to sell their home due to cash flow issues.

Mortgage forbearance allows owners to delay their mortgage payment, but this can be risky. Some institutions will require this delayed payment to be paid at a later date in a balloon payment, which may be difficult. Consulting with your mortgage servicer to inquire about the specifics is in your best interest.

EDIT: (5/5/2020) Freddie Mac has recently announced that they aim to avoid balloon payments on mortgages when forbearance ends. This is a huge relief for vacation home owners, since their income has been extremely low, and a lump sum payment at the end of forbearance would have been very hard for some owners to pay.

Some mortgage servicers may allow for your delayed mortgage payments to be deferred completely and added to the total length of the mortgage term. This would provide significant relief to vacation rental owners who are short on cash, and wont be able to make a delayed balloon payment.

People who want to sell because they are tired of owning real estate:

Some investors and primary resident owners will want to get out. They might have a tenant that has been annoying. If the tenant fails to make payments, this gives them an excuse to either evict, raise the rent at a later date (if the market allows), or sell. Some people will choose to sell instead of finding a new tenant.

Some primary resident owners will choose to hold onto cash instead of their home as an asset, as they prepare for new ventures. Cash is nice when anticipating new jobs, cities, businesses, or just a preference to rent for a while.

Some owner-occupied home owners may be scared to put their home on the market while Coronavirus is spreading. This could reduce supply. However, these owners still need to sell their home, they will just reduce showings. A reduction of showings, or switching to virtual showings, may affect the demand/ability to buy, more than the supply.

All of these factors lead me to believe there will be an increase in Sellers

The demand of residential real estate (number of Buyers) can change due to several things:

Change in the number of people living in a location
Affordability or access to money: income, mortgages, down payments etc. . .
Investment opportunity

Increase in people at home:

With an increase in people working from home, our homes become a combination of work and shelter, making it even more essential.

The pandemic has created a movement literally called “stay home.” The demand for homes, and possibly bigger homes (with office space) will increase.

The increase in remote work will most likely have a long term affect on the way the labor force is allocated.

The number of people living in Pacific Beach most likely will not change in the short term. While the premium paid for Pacific Beach homes includes access to outdoor activities and businesses, the assumption is that those luxuries will return shortly. A slight decrease in demand could be expected due to closure of beaches, bars and outdoor activities.

We mentioned how people moving for new jobs increases the supply in the section above. People moving will also increase demand in the new cities. One would think that slightly fewer people would buy than sell (not every seller will become a new owner, some may rent), so there is a net decrease in demand.

With a large portion of Pacific Beach businesses revolving around travel, including bars, restaurants and outdoor activities, many jobs will be affected.

Will owning a home be more or less affordable?

With an increase in unemployment, and businesses struggling, owning a home will be harder if expenses (prices) remain the same.

While beach and bar closure policies could change tomorrow, employment takes longer to recover.

Hiring is not an efficient process for productivity. Training and re-organizing the labor force takes up time, money and energy.

Getting a loan will most likely be harder across the board.

The federal gov’t wants to make it easier to access cash. However, currently the fed is mostly stimulating businesses that need cash to stay afloat and keep their employees.

Getting approved for a home loan was hard before COVID-19. The analysis of risk is there to keep investor’s money safe.

With the increase in uncertainty and unemployment, there is an increase in risk. I don’t know how the underwriting departments are handling this, but I would guess that investors want to be extra careful in having an underwriter approve a loan right now.

Fewer homes are profitable businesses:

The demand for investment opportunities will decrease due to short term rental issues. Fewer properties are cash flow positive (good businesses).

However, this decrease in demand could be very temporary. If traveling gets back to pre-quarantine levels, we could assume that the income would go back to previous levels. There will be a significant decrease in bookings for some time over the near future.

With substantial losses in the job and stock markets, fewer investors will be able to allocate assets into investment properties.

The combination of these increases in supply, and decreases in demand, leads me to believe there will be a decrease in Pacific Beach home prices.

Volume will most likely decrease at first, and then increase when people move for new jobs.

The main factor that could change this, is the length of significant unemployment. If the unemployment issue is fixed quickly, there is reason to believe that prices will go back towards previous levels.

Is it good if Pacific Beach home prices decrease?

A lot of people would argue that prices need to come down. Affordability has been a problem for a large amount of the population.

If home prices come down, and incomes remain relatively similar, it may create more opportunity for residents to take over a larger percentage of the housing market in Pacific Beach.

Lower prices tend to mean lower/easier down payments, which is currently a big barrier to home ownership.

A temporary dip in prices would then, in turn, increase demand, which would then tip the scale towards market equilibrium, or back towards an increase in prices.

How much will Pacific Beach real estate prices decrease?

I don’t know.

Comparing the Great Recession to Coronavirus, there are different underlying factors.

Both recessions will have substantial changes in employment/income.

However, underwriting principles are much more strict now than they were around 2005. Different types of loan products back then led to a lot of home owners needing to sell. Balloon payments, 80-20 loans financing the entire purchase, stated income loans, all led to a drastic increase in sellers.

One of the biggest unknown variables is how long quarantine will last, and how long it will take for employment to get back to a healthy state.

I would guess somewhere between a 5-20% decrease in residential real estate prices.

I know that is a wide range of outcomes. But there’s a decent chance the home prices will rebound relatively quickly compared to the Great Recession. If people get back outside, and back to work, there should be a much quicker turnaround than fixing the fundamental errors made in selling homes to people who couldn’t afford them in 2005.

Commercial real estate will be hit even worse (imagine all of the businesses closing, or businesses decreasing office space).

Should I sell my Pacific Beach home now due to COVID-19?

You and your family need a place to live.

You also need a place to work.

Owning a home has costs, which may become an issue, but moving also has costs.

Selling your home in Pacific Beach most likely involves packing up (unless the new owner rents it back to you), and then renting or buying some other home.

Moving is expensive and stressful.

So selling for the sake of anticipating a decrease in market price, might not make sense.

Especially when you consider that selling, and then buying at a later date (when prices are lower), or renting, involves fees.

Will home prices drop more than the cost of selling and moving?

Maybe not.

I’m personally holding onto my real estate assets and plan on riding the roller coaster that is Coronavirus.

If real estate was as liquid as stocks, ideally I would have sold in early February. I would hold onto the cash, which will become more valuable in times where cash/income is limited, and then buy a new home in 6-12 months, or whenever I feel that the economy is beginning to go back to normal.

But if real estate was as liquid as stocks, prices would change accordingly, and this strategy wouldn’t be feasible.

Timing the real estate market (or any market) is extremely hard, and because of the high fees (compared to stocks) it doesn’t make much sense.

Sell if you need to, or anticipate a need, or if you want to get out of an investment.

Hold if you can. You have to live somewhere. . .

If your housing payment is hurting your finances, you may want, or need, to consider alternatives. Talk with your bank, your mortgage servicer, and a realtor to find out what your options are. Maybe moving was in your near future, and selling now makes sense.

Which markets will take the biggest hit due to Coronavirus?

Luxury real estate is a “want” not a “need.”

A home is a necessity right now, especially with working from home increasing.

Luxury homes are not a necessity.

Investment properties are a luxury and not a necessity.

Homes in the higher price brackets will most likely take the biggest hit.

However, the hit may be temporary. Wealthy people usually stockpile cash during these times, and are usually the first to take advantage of discounts. They also most likely have some savings, allowing them to weather the storm.

This presents an interesting opportunity to those who are looking to get into the luxury market in the near future.

How certain are you in your prediction about the Pacific Beach real estate market?

“I know I’m intelligent because I know that I know nothing.”
– Socrates

“The more I learn, the more I realize how much I don’t know.”
— Albert Einstein

It’s important for me to state that I don’t know what is going to happen.

Let me share some humility.

When I first got into real estate, in 2011, interest rates were said to be “at rock bottom.” We were coming out of the great recession and most buyers were still scared of the market doing a “double dip”. People didn’t want to buy a home and have the market go down again. To help with the fear, and lack of supply of investors/cash, the federal government created a stimulus package to encourage growth in the economy. As a part of the stimulus package, the fed loaned money to banks at 0% from 2008 – 2015.

Assuming the fed’s rate will never go below 0% (they’re never going to pay us, to have us take their cash, right?), the only way for the fed’s rate to go – was up, right?

One of the factors in determining mortgage interest rates was how easy it was for banks to borrow money from the fed – the fed’s rate. So, many “experts” speculated that because the fed’s rate was at 0%, and that the stimulus package, or quantitative easing, would eventually end, that interest rates must go up.

This was a sound opinion. To be fair, interest rates were relatively at “rock-bottom.” 30 year mortgage rates were around 4%, compared with rates from the early 2000’s and mid 90’s, which were around 8-9%.

So, in 2011-2013, I frequently told my clients, “There’s no way interest rates can go anywhere but up”.

It was one of the excitable insights I shared with clients to get them excited about buying a home.

Source: http://www.freddiemac.com/pmms/pmms30.html

Now, 9 years later in 2020, interest rates for a 30 year mortgage is approximately 3.45%

I was wrong.

Now, the people that bought a house with me in 2011-2015 are very happy. Home prices have increased substantially (some have almost doubled in value), so the fact that interest rates have actually gone down since then, is a relatively moot point.

So what’s the point of this rant that has nothing to do about Coronavirus?

To share with you that I’ve used deductive reasoning to formulate an opinion which I was relatively certain of, and I’ve been wrong.

With that being said, I really cant imagine homes prices increasing right now.

Lots of people lost their jobs. People will need to sell. This will affect the Pacific Beach real estate market.

If you want to talk with a real estate agent, give us a call, or comment below.

How will Coronavirus affect the Pacific Beach residential real estate market?