Analysts have claimed that the housing market will be a major player in the post-Covid economic recovery — and by and large, they’re right. But while some first-time buyers are well-positioned to break into notoriously competitive markets such as the Washington, D.C. region’s, those who’ve struggled financially thanks to the virus may find themselves priced out once they regain their footing.
Home sales are a positive gauge for an economy because, as John Walsh from the Urban Institute’s Housing Finance Policy Center said, people will commit to their life’s most expensive purchase when they have the money to do so.
That demand creates a multiplier effect — more people wanting homes means there’s more interest in building them, helping those in the construction industry as well as those with jobs at utility companies. And it keeps real estate agents busy with selling homes and mortgage loan companies active by helping people finance them.
“Especially when you’re building homes, you’re hiring labor and buying everything that you’ll need for that home,” Walsh said. “You’re inspiring different pieces of the economy and funding them when you build a home.”
This is a change from how the Great Recession unfolded. Back then, the generosity of mortgage companies to default-prone clients facilitated the decline and damaged a traditional pillar of an economic recovery. Just like how Walsh explained housing sales have a multiplier effect in a positive way, it can also be negative — for example, the housing collapse made employment growth in the construction industry stagnate for nearly four years, as Bloomberg News noted. Less construction workers meant less housing being built, which created inventory challenges and made for a tighter market overall.
Harvard University’s Joint Center for Housing Studies said that lower interest rates inspired by recessions (in this case, historically low rates below three percent) reduces borrowing costs for both homebuyers and builders, which makes homebuying more attractive and spurs homebuilding. Again, it’s that multiplier effect in action.
Northern Virginia’s market has been no stranger to this trend. After the spring lull, sales began heating up in June and haven’t slowed since, according to Northern Virginia Association of Realtors president, Derrick Swaak. The region saw year-over-year increases in dollar sales volume (13 percent), average price sold (nine percent) and total number of homes sold (four percent), all while seeing a steep drop in average days-on-market (21 percent).
However, Swaak did say that the City of Falls Church was the only jurisdiction that cut against the regional trends. The average volume of sales were down nine percent in the City, with a four percent decline in average price per sale. Swaak said it was purely a function of inventory — the City’s consistent bugaboo given its limited space — and how a few less sales can have a noticeable effect on percentages compared to larger localities.
The winner from all this? First-time millennial home buyers.
“Millennials are now in the homebuying stage of their lives,” Swaak said. “They may be renting and now maybe they’re buying a single family home in the city. And in some cases, they’re moving out even further beyond the beltway into places like Loudon County or even further out. Technology allows them to do that.”
It’s not a luxury everyone has been afforded — or even can afford. After years of dwindling wages, low income earners started to see their pay increase starting in 2014 and accelerate from there. CBS News reported that by the end of 2019, they were outpacing higher earners in terms of percentage of wage.
The pandemic has upended many in low income jobs, whether they work in the restaurant industry or help at entertainment venues. Walsh from the Urban Institute pointed out that, since those jobs aren’t large drivers in the D.C. region’s economy, they won’t sway much of the region’s very positive home sales data. He even mentioned that the combination of stimulus checks and having less expenditures given the lockdowns has likely improved many people’s financial situations in the area.
But it doesn’t mean everyone’s been so fortunate. Sherly Pardo, who is part of the Urban Institute’s communications team, said that some homeowners could have lost their job, yet also could have seen their home value increase during that time. However, since crediting standards have been stringent since the onset of the virus, they may not be able to tap the improved equity in their home if their personal finances aren’t up to snuff. Only the most well-off have that opportunity.
Pardo also believes this will exacerbate the racial gap in homeownership.
“People who are Black and Hispanic disproportionately have lower credit scores, work in the service industry and are renters, so all of those things are going to hurt you right now,” Pardo said. On top of that, those groups are getting a larger share of infections from Covid-19, Pardo continued, adding a steeper hill to overcome.
Walsh said that one thing that could help is local governments making it easier for builders to construct single-family and multi-family housing. He estimated that regulations alone can sometimes contribute a third of the cost of a single home build. Finding ways to lower that bar and make the building process more profitable will only help inventory problems, particularly among affordable homes that are bid up into higher price ranges.