It’s All About Supply and Demand
Although there is plenty to be cautious about regarding Covid-19, its effect on the real estate market should not be one of them. In fact, history has shown that in the wake of a pandemic, the real estate market as a whole has rarely, if ever, been largely affected.
Like most markets, the real estate industry is all about supply and demand. The supply and demand in real estate can be broken down into one cardinal rule:
1) If we have too much inventory (number of houses for sale) and not enough demand prices (home values) will go down
Other than the Great Depression and the 2006-2008 Recession, supply outgrowing demand doesn’t happen at a large scale.
In fact, recessions usually cause investors to shift their capital from the stock market into real estate. You could say that the stock market and real estate industry have a negative correlation, meaning that as one goes down, the other goes up. So when the stock market falls dramatically, the real estate industry typically improves. That shift in capital increases buyer demand, which increases home values.
Another reason housing markets have flourished in times of crisis is the Federal Reserve. For example, after the 9/11 attacks, the Fed decided to cut interest rates to historic lows, and by doing so, were able to stimulate the housing boom of 2002, 2003, 2004 where we saw one the fastest and steepest spikes in real estate values.
As the Covid-19 pandemic has caused widespread concern, the Federal Reserve has been responding in kind, slashing interest rates to the lowest level of a generation.
For decades, real estate has been considered an incredibly safe investment, which is why so many investors will move their money into real estate during tumultuous times. Here are two other factors to consider regarding the real estate market, and how things have changed since the Great Depression and Great Recession:
The Federal Government works hard to ensure that the economy stays healthy.
Home supply is nowhere near what it was in 2006, and we are currently facing the lowest real estate inventory in United States history. In fact, in northeast Florida we have a housing inventory of less than two months!
So believe it or not, we are now facing the perfect storm where mortgage interest rates have been dropped down to historic lows coupled with heightened demand due to investors fleeing the stock market, and the lowest housing supply ever before in history. We’re poised to see home prices soar!