May 22, 2020 By: Scholastica (Gay) Cororaton
Every month, the National Association of REALTORS® conducts a monthly survey of its members about their monthly transactions and their outlook in the next 12 months. NAR’s April 2020 Realtors® Confidence Index (RCI) Survey shows the effect of coronavirus social distancing measures on the housing market. Here are five trends based on the latest April 2020 data:
Rising share of first-time buyers as investor buyers retreat
- The negative economic impact of social distancing measures has shifted the mix of homebuyers. Investor buyers have retreated, while the share of first-time buyers has increased. The share of first-time buyers rose to 36% in April 2020, up from 32% one year ago.
- Meanwhile, sales for investment rental or vacation use declined to 10%. The share of purchases for investment rental dropped from 11% in February to 6% in April 2020.
- With fewer investor buyers, cash sales decreased to 15% of existing home purchases, down from 20% one year ago.
- Homebuyers are facing less competition from investors, and they are also benefiting from low mortgage rates. In April 2020, the 30-year fixed mortgage rate fell to a record low of 3.3%. The estimated monthly mortgage payment on a home purchased at the median price of $286,800 with a 10% downpayment on a 30-year fixed loan1 was $1,131, just $90 more than the median rent of 1,041 (as of 2020 Q1).
- What might explain why potential investor buyers are staying on the sidelines? One plausible reason is the expectation of greater financial risk associated with renters. The social distancing measures have hit hard certain occupational groups―food service/ hospitality/recreation workers and retail trade workers. These occupation groups are more likely to rent compared to other groups. In 2020 Q1, the national US homeownership rate of 65.3%, while only 51% of food service workers were homeowners.2
- Will investors purchase many single-family properties as they did during the Great Recession? Not likely because during the Great Recession, there was a wave of foreclosures and the properties were purchase by investors. In the current health and economic crisis, properties are not being foreclosed, though 8% of mortgages, or 4 million properties, are under forbearance. FHFA announced last May 13 a payment deferral option that allows homebuyers to pay off the missed payments when the house is sold, refinanced, or at the end of the loan term, making the current mortgage payment to remain affordable.
Decline in sales in urban areas and condominiums
- Social distancing measures have also resulted in a lower share of buyers who purchased property in urban areas. Based on the April 2020 survey of Realtors®, the share of homes sold in the urban area or central city dropped to 15% from 22% in February 2020. This survey data is supported by the April 2020 data on existing home sales that showed a steeper drop in condominium sales compared to single-family homes. In April 2020, condominium sales on a seasonally adjusted basis fell to 390,000 units, a 26.4% decline compared to the prior month. Single-family detached homes fell to a seasonally adjusted annual rate of 3.94 million, a 16.9% decline.
- At this early stage, the decline in sales in urban areas is related to social distancing measures and office/government shutdowns. Over time, the rising share of suburban home sales (if it happens) will reflect not only the effect of social distancing measures but the increasing number of millennials who will be purchasing property in the suburban areas as they get married and start to have children.
Increasing use of virtual tours/showings/open houses
- Social distancing measures have resulted in fewer in-person client tours. In April 2020, 63% of respondents reported they took a client on a home tour, a steep drop from 98% in February 2020.
- But while the fraction of respondents who reported conducting in-person client tours have declined, 46% of respondents reported that they took a client on a virtual tour/showing/open house in the past month. On average, they took nearly 2 clients on a virtual tour/showing/open house.
- A fraction of buyers and sellers closed a deal using virtual methods only: 4% of buyers purchased the property based on a virtual tour/showing/open house only, while 5% of sellers sold their property using virtual means only.
- Will the use of virtual tools be sustained? A home purchase is the biggest financial investment a person will make, so homebuyers who intend to use the home as a primary residence will probably still prefer a physical tour rather than a virtual tour. However, some buyers may be willing to purchase the property based on a virtual tour alone, such as buyers who are purchasing the property because primarily for location purposes or to flip.
Rise in contract cancellations related to job loss
- The share of contract terminations has been rising; 12% of contracts in the past three months were canceled, from 4% in February 2020.
- Of the contracts that were terminated, 31% were due to the buyer losing his/her job, up from only 1% in February 2020, and 41% were due to “Other” reasons most of which were coronavirus-related such as “buyer got cold feet”, “got the virus” or “got sick.
- 25% of contracts had a delayed settlement. The median days to close, typically 30 days, rose to 35 days in April 2020. Respondents reported slower mortgage processing time, slower appraisal time, and delay related to government office shutdown.
Prices remain firm and listings are starting to recover
- On average, Realtors® listed one property in April 2020, a 50% decline from the average of two listings per month in February 2020.
- On average, Realtor® respondents reported two to three interested buyers on a property that sold in April.
- Realtors® who responded to the survey expect prices to remain stable in the next 3 months and to pick up later on, with prices expected to be 1% higher one year from now. Only 9% of respondents expect prices to fall by more than 10% in the next three months.
- However, new contracts and new listings are coming back in May3. As of May 17, new contracts were down 20% on a year-over-year basis, from a deep decline of 40% in the last week of April. New pending sales were down 29%, from a trough of 41% in the first week of May.
About the Realtors® Confidence Index survey
The April 2020 survey was sent to 50,000 REALTORS® who were selected from NAR’s more than 1.4 million members through simple random sampling and to 8,842 respondents in the previous three surveys who provided their email addresses. There were 4,964 respondents to the online survey which ran from April 4-12, 2020, of which 1,946 had a client. Among those who had a client, the survey’s maximum margin of error for proportion estimates is two percent at the 95 percent confidence level. The margins of error for subgroups are larger. NAR weights the responses by a factor that aligns the sample distribution of responses to the distribution of NAR membership. For information about this survey, email [email protected](link sends e-mail).
1 At Freddie Mac 30-year fixed contract rate of 3.3%. Additional fees may apply based on your credit score. Please contact your lender to get an accurate estimate.
2 Calculation based on the 2018 American Community Survey, 1-year PUMS.
3 Based on preliminary data from about 200 MLS.