It’s almost summer, and while the temperature outside may not be hot, the housing market sure is. And yet if you are looking for a home, you probably know how challenging it is to be a homebuyer during the pandemic. When Covid-19 hit, the housing market froze. Home sales abruptly stopped, as buyers, sellers and lenders alike were uncertain how to navigate the housing market during an unprecedented pandemic. But since lockdowns were lifted and we became more comfortable with our new way of life, the market has been booming.

Let’s explore how Covid has affected the current housing market.

Low Inventory

Prior to the pandemic, there was already a dearth of homes on the market. But the pandemic made the shortage even worse, as there is currently only a 2 month supply of inventory. As strange as it may sound, that means we could actually run out of available homes! With only 1 million homes for sale, there aren’t nearly as many houses on the market as there typically are. So why is inventory so low?

Homeowners Aren’t Selling

There are a number of reasons to explain why homeowners are staying in their homes. Even with the vaccines, some sellers simply aren’t comfortable having total strangers in their homes. And many older sellers who would normally retire and downsize to a condo or apartment are staying put. They are choosing space and breathing room over tight hallways and shared common areas where the virus is more likely to spread.

Likewise, there is also a tremendous amount of uncertainty associated with the pandemic. Many homes that were for sale at the start of the pandemic were pulled from the market due to the unknown. The world hasn’t seen anything like this since the Spanish Flu of 1918. We are experiencing an unprecedented global event that has rocked the entire world, and people just don’t know what lies ahead. Countless Americans lost their jobs, their sense of security and even their family members to the virus, and they may be waiting for the return of normalcy (or maybe a new normal) to make any big life decisions.

The pandemic has driven sale prices up enormously, which is great for sellers, as they would end up selling for more than their homes may be worth. But if someone is selling their home while also looking for a new home, they will most likely be impacted by that same price increase from the other end–as the buyer. So while they may sell for more, they will also need to spend more for their new home, while also facing increased competition, tight deadlines and other home-buying issues related to high demand.

Additionally, low interest rates (more on that later) caused many homeowners to refinance their existing mortgages. Lower monthly payments mean more money in homeowners’ pockets, giving them more financial security in an uncertain time. And many homeowners feel the better financial decision for them is to renovate their current home (especially if it’s paid off or refinanced at a lower rate) instead of buying a new one. Renovations are not only for the homeowners’ short-term enjoyment and benefit; they also increase the home’s value. With so many people stuck at home working remotely, zoom-schooling and even quarantining, the home improvement industry is experiencing a boom, both with smaller “honey do list” projects as well as larger renovations.

Moratorium on Foreclosures

In an attempt to prevent a housing market crash, the Federal Housing Finance Agency (FHFA) announced a foreclosure moratorium for federally guaranteed mortgages, which will be in effect through June 30, 2021. This was meant to ease the burden on current homeowners facing financial difficulties due to the pandemic, such as job loss, hospital bills, etc... Homes that would have faced foreclosure in any other year simply aren’t for sale. Fewer foreclosures mean even fewer houses on the market.

Lack of New Construction

Inventory is also affected by a decade-long decrease in new construction. And the pandemic has compounded the issue, with the amount of new homes decreasing even more due to delays and rising costs. Lockdowns abruptly halted builds and the manufacturing of materials, which led to construction delays. Builders had to deal with delays due to workers getting sick and needing to quarantine. They were also held up getting building permits and setting up utilities, as utility companies faced their own delays.

In addition to delays, builder costs skyrocketed. Manufacturing and distribution delays led to soaring prices for building materials such as roofing tiles, drywall, lumber and even fixtures and appliances. These rising costs drove up the price of new construction homes, which indirectly helped drive up the entire housing market.

Due to all these factors and more, many builders chose to play the waiting game and hold off on new construction until the uncertainty of the pandemic subsided. And the lack of new homes makes the total pool of homes for sale smaller.

High Demand

Supply and demand is an age-old concept—lower supply causes higher demand. And with such low housing supply, the demand is at a record high, which means competition is high. As more and more people work from home, there’s no longer a need to be close to their office. When your commute is from your bedroom to your dining room, you can live anywhere. And due to Covid concerns, many people want to live in suburban houses with backyards, more square footage and open space over city apartments with crowds and smaller, shared spaces, adding even more stress to the already red hot suburban housing markets. The increased competition is driving higher prices and faster than ever selling times.

In a typical housing market, a buyer has time to think and may even return to a home for a second or third visit before making an offer. That’s not the case now. Buyers need to act fast with houses selling in days and even hours in some cases. According to Redfin, houses are selling so fast, over 40% of homes are under contract in less than a week. And Redfin reports that 63% of prospective homebuyers in 2020 made an offer on a house they never saw in person, just via virtual tour.

High Sale Prices

Low inventory and record-high demand have contributed to exploding sale prices. Competition has led to bidding wars well over the listed price with buyers going to extremes to make their offer more appealing, like paying cash, waiving inspections and appraisals, making offers the same day and offering to close immediately.

The housing market has more than rebounded from its standstill at the beginning of the pandemic. It is so hot, prices are soaring—rising at the fastest rate in 20 years. Prices are up more than 11% from this time last year, and 48% of homes are selling above their list price. And there just isn’t enough new construction to balance it out and slow the rise.

Low Interest Rates

Due to the pandemic, the Federal Reserve lowered the Federal Funds rate. This enabled banks to offer lower interest rates for mortgages, which means lower monthly payments for borrowers. In January 2021, Freddie Mac reported that the 30-year fixed mortgage rate hit a record low 2.65%, and mortgage rates dropped to all-time lows more than 12 times in 2020. Rates have increased in early 2021, but they’re still very low, down 2 percentage points from 4.94% in November 2018.

Low interest rates not only allow prospective buyers to find a new home, but they also give current homeowners an opportunity to refinance and save money on the home they already have. With lower monthly rates, those homeowners gain equity faster and have freed up money to spend elsewhere (such as a renovation) or to save/invest.

So how much do interest rates really matter in the long run? Compare getting a $400,000 mortgage in November 2018 to getting it today in May 2021. At 2018’s rate mentioned above (4.94%), you would pay $767,751 over 30 years. At today’s rate (2.75%), you would pay $587,867. The difference is $179,884. That’s…a lot. So when you look at it with actual money instead of abstract figures and percentages, it’s easy to see why so many people are taking advantage of low interest rates.

The Bottom Line

With low inventory, low interest rates, high demand and even higher sale prices, the housing market is on fire. It can be frustrating to find a new home during the pandemic, but the good news is there’s a light at the end of the tunnel. In the meantime, keep searching for your dream home and keep dreaming of a day when masks, social distancing and low housing inventory are a thing of the past.

Arlene Isenburg

Arlene Isenburg