It’s not an exaggeration to say that nearly everything has changed in the past month due to the coronavirus—and real estate markets are no exception. Almost every single sector of the economy is facing unprecedented challenges, but especially the construction industry.
Starting with supply chain interruptions from China when that country was facing the worst of the pandemic, there have been slowdowns at nearly every turn. Now that the US is dealing with the virus, projects are taking longer and longer to complete as appraisers and inspectors can’t get into homes while families shelter in place there. While this isn’t their fault, many homebuilders feel completely at a loss.
“We’re reacting to news and dealing with it accordingly,” says Joe Fowler, president of the Home Builders Association of Greater Austin. “This is so fluid and things keep changing based on whatever is happening on any given day.”
A significant percentage of building materials, estimated at 30% by Richard Branch, chief economist for Dodge Data & Analytics, is exported from China. These exports can be everything from copper and steel to cabinetry and fixtures. With factories in China closed or at reduced capacity in response to the virus, production slowed or even halted entirely. The impact of this was delayed for American homebuilders, but we are finally feeling the effects of this. Toll Brothers, one of the country’s largest homebuilders, recently announced that shortages of lighting fixtures and small appliances will delay the sale of some of their new homes in California. While some builders have been able to find alternative suppliers here at home, it hasn’t been easy.
“In construction, everything comes down to time and money. With the coronavirus, we don’t know how big it’s going to be, how long it will last, and what its full impact is going to be,” says attorney Steve Lesser, a past chairman of the American Bar Association’s Forum on Construction Law.
In January of this year, Fannie Mae economists forecasted a stellar 2020 for the housing industry. Thanks to low unemployment, solid wage growth and low mortgage rates, housing starts were predicted to jump from 1% per year to 10% in 2020, which would have made it one of the best years since the last housing boom in 2007. Now, with unemployment at record levels and climbing daily combined with unstable financial markets, buyers and commercial developers have all but disappeared.
Home builders are still building new homes, though sales centers and Realtors with open houses are seeing a marked drop in foot traffic -- likely due to both social distancing and economic insecurity. Similarly, online real estate portals like Zillow and RedFin have seen a significant drop in both web traffic and new listings since the outbreak began in the States.
The National Association of Realtors released a survey that found nearly half of agents agreed that home buying interest had declined due to COVID-19. Home buyers who are still actively seeking to purchase are opting to minimize risk with virtual home tours or having their Realtor give them a video chat walkthrough.
Even for buyers ready to make a purchase, the process is unavoidably delayed by things out of anyone’s control. Appraisers and home inspectors aren’t able to do their jobs as long as the current homeowner is sheltering in place there. Planning and zoning departments are taking longer to approve permits due to limited access to historical records and blueprints while they work from home. These backups can cause delays for lenders, who are already facing a tidal wave of refinance applications as well. This chain of setbacks can leave homeowners, home buyers and Realtors scrutinizing their contracts and insurance policies to see who may be liable for increased costs or delays.
“There are many terms that will be relevant to those discussions, including the various contractual terms relating to the contractor’s schedules, substantial completion, delays, liquidated damages and other contractual provisions,” said Michael Keester, a partner at law firm Hall Estill in Tulsa, OK.
There’s a glimmer of hope in all of this if you’re an investor. As many learned after 2008, an economic downturn or recession is fertile ground for investment real estate. Because of forbearances and temporary forgiveness, it may be a few months before foreclosures hit the market en masse, but there are still sellers who need to sell now. Due to the current economic climate and the increasing lack of demand, the market will likely quickly become a buyer’s market.
Between that and current financing rates at record lows, now is a great time to form your Series LLC and buy because while the home buying market may fall, experts say the outlook for the home rental market looks good. Landlords who can provide single family housing with a yard or the ability to accommodate multiple family members working from home will be a very valuable thing in the coming months. Epidemiologists say we may be facing up to 18 months of varying levels of social distancing, so renters will be looking for housing that can make this new normal more viable.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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