COVID-19 and the Utah Real Estate Market
Without dwelling on the political ramifications or finger-pointing about who did or didn’t do what, the bottom line is that COVID-19 has caught many of us with our pants down. Now, while no pants Thursday is an idea we can get behind, the truth is, no pants usually means no pockets, and no pockets means you have nowhere to put stuff, you’re unprepared. COVID has caught many of us unprepared.
The housing market might be in one of those no pants, no pockets situations. The pandemic has proven a problem for the real estate business in Utah. But, unlike most places in the country where COVID has stopped construction, here in Utah, the pandemic has actually exposed a decades-old problem more than it has presented a new one.
We’ll get to that in a minute, right now, let’s take a look at the overall effect the pandemic has had on housing, construction, rents and mortgages here in the land of life elevated.
In the Beginning
At the start of 2020, Utah housing experts were predicting that the median home price in Salt Lake County would top $400,000 for the first time. However, three months after the state shut down businesses, economists are singing a different tune.
The possibly troubling news, according to James Wood, the Ivory- Boyer Senior Fellow at the U of U’s Kem C Gardner Policy Institute, the COVID-19 recession will cut residential construction and existing home sales by 8% to 10% in the year. Uncertainty in the existing homeownership market in response to the pandemic will create challenges for both buyers and sellers. But, these challenges can be overcome.
This is the word being used to describe the state of current mortgage rates. They are historically low. This is good because there is a certain amount of stability in the financial markets so, this will ease up on what could have been a severe strain on buyers, sellers, renters, and builders.
Economic contractions tend to cause buyers and sellers to duck for cover. We saw this in the great recession of 2008. Now, the pandemic was certainly sudden and it is definitely severe, making our future show a tinge of uncertainty.
This uncertainty has caused some developers and buyers to put a hold on transactions that would have normally taken place in the spring and summer.
On top of the pandemic, the construction supply chain has been bruised. China supplies 30% of construction materials and not much is coming out of China these days.
Let’s add one more factor to that; with city and county personnel mostly working remotely, the approval process for new developments will likely be extended. It’s taking longer and in the interim, people may lose confidence or the desire to risk the investment in a new home.
This was all based on predictions by places like the Gardner institute for the 2020 housing market. The pandemic was certainly a curveball. But, how disruptive has it actually been?
By the Numbers
Let’s dig a little here and look at some of the major components of the housing market.
Single Family Construction
In 2019 there were no signs that the single-family market was overbuilt. The number of new homes receiving building permits statewide was roughly 11,900. That’s only slightly below the numbers from 2017- 2018. However, with the economic downturn and social distancing, the experts predict a slowing in new construction activity and sales. The good news is that the number of permits for single-family homes should be down only about 5%.
This current situation is not at all like the great recession of 2008. During that time, there was a 45% drop in the fourth quarter of the year. That drop came in the wasteland of the post-Lehman Brothers collapse. That drop in housing permits was due to credit markets seizing up. Right now, there is credit available and, as we pointed out, mortgages are historically low.
So, if anyone is worried that what we’re facing is a replay of the recession, they need not worry. The fact that there is credit available and mortgages are low makes this a very different landscape. Much different than it was when banks and money management companies were caught pantsless and the entire foundation of our economic structure crumbled in a blaze of greed and carelessness. The money is there, so the single-family housing market shouldn’t be tumbling into a 2008-esque free fall.
Condos and Townhome Construction
Looking back at 2019 we saw a record high for permits issued to build condos and townhomes. The number reached about 5,752.
In 2020 things are a bit different and here’s why: The investment market dove the demand for townhomes and condos up in 2019, with investors buying 3 or 4 units to rent. Now we’re looking at a volatile stock market that is still struggling with the process of correcting itself. Add to that the fact that there is historic job loss and you’ve got a problem.
A younger, moderate-income household has traditionally been the prime target market for condos. However, due to the uncertainties in the current job market, this group is most likely to postpone home buying for a while. At least until the job situation stabilizes. So, we’re seeing that weak demand from investors and unstable job markets are cutting into the condo and townhome market.
What the Pandemic Uncovered
Home sales dipped in April and May due to concerns of both buyers and sellers. However, June saw an incredible increase in the housing market that has left supplies of available homes dangerously low.
Now we’re seeing high demand spurred on by low interest rates and the deficit in housing supplies adding up to an exacerbation of the housing affordability problem that we have in Utah.
However, the trouble for renters and possible home buyers was in the wind way before the pandemic struck.
At the start of the current health crisis, Utah was dealing with an estimated gap of roughly 50,000 fewer homes than family units or households. This comes after a decade that witnessed both home prices and average rents grow faster than the median household income.
With the gap, a situation has been created where friends and family members, usually across several generations, are doubling up in the same home. Here in Utah, we don’t have enough homes for people and our homes and rents are pricing people out into the streets. This is a problem that has been going on for a while and the pandemic has made it very clear.
On top of that, the overcrowding situation has started to exacerbate the rise in COVID cases.
This cannot be stressed enough, the current real estate market is in no way the same as it was back in 2008 during the great recession. It needs to be stressed because there seems to be a lot of panic about so much right now. In 2008, the housing crash damaged the financial and credit markets. Right now, there is still money to lend and rates are good. Despite the inordinate amount of panic around us, we are not looking at another 2008 housing crash.
There are still home builders offering beautiful single-family homes, estates, and townhomes all over the State. They have been able to keep their construction flow even because they took quick action when the pandemic first struck. They instituted safety protocols that allowed for secure work environments, so building has continued.
The Utah housing market seems to be bouncing back. There are a plethora of apartment buildings going up all over downtown and companies like Revere Homes have lots for sale and floorplans to be filled. This doesn’t negate the fact that we are in the middle and seem to be continuing to face a housing shortage. Nor does it erase the fact that rents are too high for most people.
But, as opposed to some parts of the country, Utah isn’t looking at empty houses that will ever sell, or a lack of construction and growth, we’re in need of more affordable houses and apartments.
But, we can feel confident that the pandemic will eventually be curtailed, and afterward, we won’t be picking up the pieces of a complete and total financial ruin. The housing situation, this time around, is healthier than we have seen it in the past.