The spread of COVID-19 in the United States is alarming and still highly unpredictable. As communities embrace precautions such as school closures and ‘social distancing,’ a new quarantine economy has already altered daily life nearly overnight. These necessary behavioral changes will have economic ramifications that last beyond the quarantines themselves.
Today, social distancing is transforming homes — many Americans have reconfigured their homes into offices, kindergartens, and gyms in the past week. In addition to these immediate changes, the pandemic and its ensuing economic consequences are poised to transform the housing market in lasting ways. It is too early to predict magnitudes as we both learn and adapt together, but we should already be aware of the key mechanisms to expect as COVID-19 reshapes the housing market.
1. Mobility will be low in the near-term and spike in recovery
Moves fuel the housing market. In the coming months, both safety concerns and economic uncertainty will keep more people in their current homes. Geographic mobility generally declines during downturns, when a lack of job opportunities catalyze fewer long-distance moves across markets or housing upgrades.1 This time around, infection concerns and social distancing will lead to even fewer people wanting to move. Eviction and foreclosure moratoriums will further slow mobility by keeping households affected economically from experiencing housing instability during a health crisis.
Once we are past the peak, however, those waiting for a more safe and certain time to move will do so. Many upgrade and downgrade moves will be postponed rather than canceled, creating a reshuffling of households throughout the recovery. These moves will encompass job-movers, those moving to be closer to family, and young adults moving out on their own. Many of those hurt financially during the pandemic will also move simultaneously once eviction moratoriums are lifted. Despite fewer total moves, many moves may all happen in a short window of recovery.
2. The “remote work experiment” will cause companies and workers to reconsider their location
Over the last decade, many companies (new and old) have invested in proximity, paying sky-high commercial rents in knowledge hubs such as San Francisco, Seattle, and New York City. In response to COVID-19, however, many of these companies are now having all their employees work from home in an unprecedented “remote work” experiment. Though many can’t wait for their daily routines to resume normalcy, some firms will surely deem the experiment a success. Firms whose employees remained productive and innovative during this period may not want to resume normal operations (and re-sign the lease on the office space). Similarly, workers who find themselves happier working at home without a commute may want to continue the arrangement even after coronavirus fades.
This shift could have significant implications in the long-run. Today, the rise of remote work has concentrated in mid-sized technology hubs such as Raleigh, Austin, and Denver. If workers become more mobile and untether from expensive coastal markets, these economies will continue to grow. Meanwhile, demand for commercial real estate will decrease. Some firms may realize they need less office space than they previously thought. At the same time, a prolonged quarantine will, unfortunately, lead others to shut down entirely if they are unable to weather the storm.
3. America will hit pause on the long-run trend of urbanization
Urban cores have boomed over the past decade. Companies have been migrating from office parks to dense urban centers, and high-earning college-educated young adults have been embracing city life with shared amenities. In the average American city, per capita incomes are now highest in the city center.
Cities thrive on social interaction, and the outbreak of coronavirus turned off most of the benefits of urban living overnight. Shared spaces and assets in the form of restaurants, co-working, and events don’t exist in the temporary quarantine economy. The small businesses that power these activities will be hit hard in the meantime, possibly needing to close or relocate to lower-cost areas. Time will tell whether the trend of urbanization will reverse, but we should expect the expanding economies of dense urban areas to take a significant hit in the next year.
4. Rents will fall for some, but affordable housing will be hard to find
Before COVID-19, affordable rentals and homes for sale were already in short supply across many markets. In 2019, a quarter of all renter households spend half of their income on rent. Fewer people moving means fewer homes available. With both pandemic and policy keeping people in place, affordable units will become even more rare through the 2020 peak season.
Luxury apartment inventory, on the other hand, which has led the construction recovery since the Great Recession, may soon be plentiful. The number of multifamily units permitted in the last three years has set a thirty-year record. Most of these new communities will cater to the higher end of the rental market and many will come online in the next year.2 A coronavirus recession, however, will slow the growth of high-income renters searching for this inventory. Once we reach recovery, supply competition will drive prices down at the higher end of the market, creating deals for those high-income households still looking to move.
5. Housing inequality will grow
Uneven growth in housing costs has exacerbated income inequality in the U.S. since the Great Recession. Since 2008, the bottom ten percent of earners have seen their housing costs rise, while the richest quarter of the population has actually seen their housing costs fall. The pandemic’s economic effects are likely to accelerate this trend. Over the next two years, higher earners will take advantage of low borrowing costs for refinancing and abundant luxury rental inventory, while lower-income households will struggle with economic uncertainty and even greater competition for an already tight inventory of affordable housing.
Moreover, as shelter-in-place orders cover a growing share of the nation, those who are able to work remotely are at a distinct economic advantage. Unfortunately, a correlation between income and the ability to work from home reveals that the lowest earners will be hit hardest by these measures. Among full-time workers who earn over $100,000 annually, 52 percent say that they are able to work from home, but the same can be said for just 15 percent of those earning less than $25,0000.
6. Homeownership plans will have to wait for many young renters
Last year, we estimated that nearly half of millennial renters who planned to purchase a home had saved nothing for a down payment. The other half has likely seen a significant hit to their savings in the past few weeks. Home values, however, are unlikely to fall significantly because (1) low mobility leads to low available supply on the market and (2) home values may still capitalize optimism about a strong recovery. The result is that many young renters will delay homeownership even further.
For Gen Z, who came of age during the longest economic expansion on record, this pandemic will shape expectations and outcomes. This cohort has been touted for their strong preference for homeownership, but the class of 2020 will need to face the long-run economic effects of graduating during a recession. Their views and behavior may ultimately differ significantly from what their teenage-year survey responses implied.
7. The rise of sight-unseen housing choices will accelerate
Many families will still need to move in 2020, and those that do will be more likely to move into a new home sight-unseen than ever before. Many apartment communities are already enabling virtual tours in response to the pandemic, and many renters and owners alike may soon be evaluating their next home through a tablet screen. Mainstream adoption of sight-unseen moves will bring both opportunities and challenges for the housing market.
The good news is that technological innovation has the potential to enable seamless transactions that do not require in-person visits. The widespread use of these tools is likely. The bad news to watch out for is that sight-unseen transactions have, in the past, attracted elevated levels of rental fraud. Buyers and renters will need to stay alert, do their research, and work through trusted platforms to stay safe at a time when individual verification will be challenging.
Editor’s note: Mr. Popov is the chief economist at Apartment List, where he leads the Rentonomics team in publishing original housing market research. He teaches an undergraduate seminar titled "Housing, Neighborhoods, and Homelessness" at Stanford University, and his research has been published in the American Economic Review. Prior to joining Apartment List, Mr. Popov worked as an economist and data scientist at Airbnb and earned his Ph.D. in economics at Stanford University. He can be reached at firstname.lastname@example.org