Value Factors for Real Estate Buyers
How will the Pandemic affect real estate values?
• Buyers hope it will lead to lower purchase prices.
• Sellers hope their property values will remain at pre-virus levels or even increase.
• “Hoping” has nothing to do with how real estate values rise or fall.
Unless you are buying a property in each and every state, what’s happening in real estate markets across the country is less important to you than what’s going on in the neighborhood at the top of your preferred-purchase list. If you plan to buy one, two, or three properties over the next few years—perhaps one home, one recreational, and one investment—that may spread your attention across one, two, or three real estate markets. The value situations for each location you consider may be dramatically different for you and will be specific to each local market.
Buyers benefit from understanding the value factors in play for a real estate market they want to buy into. The Covid epidemic upheaval of social and economic norms and patterns may alter local market value patterns. As months roll on, the ways in which value is affected will become evident. How will you know where location value lies in your preferred real estate market?
Property value in residential real estate markets has traditionally been linked to four key location value factors:
#1. Proximity to schools:
This has long been a significant location value factor. As part of the stay-at-home strategy to fight Covid 19, education at all levels has moved online—perhaps irreversibly. Will that mean a student may qualify for “virtual attendance” to a favored school without moving into that school’s catchment area? Or, will homeschooling gather significant momentum, so that proximity to great schools is no longer a key factor?
The Traditional Element: “Is School Improvement Part of Your Ownership Strategy?”
#2. Proximity to a popular shopping mall or business district:
“Hot” shopping areas can add value to nearby properties. If the Covid depression replaces that shopping with home-delivery online ordering or compromises or closes stores, property values may decline.
Those in isolation often reminisce online about local restaurants, bars, and other entertainment favorites. At the same time, owners of those beloved bars and restaurants are lamenting heavy financial loss with many expecting not to survive. If an area becomes economically depressed and loses the ambiance of its entertainment businesses, fewer buyers may be attracted to the area, lowering prices further. Well-known neighborhoods may change dramatically post-Covid, so buyers will benefit from investigating the new future for locations they can love.
#3. Proximity to employment opportunities:
Ease of employment guarantees steady, predictable income to make home, lifestyle, and future plans affordable. The pandemic depression is predicted to descend on many areas and lead to shutdowns and closings that may reduce employment opportunities for a significant period of time.
On the other hand, a recent Kung Group survey of +500 Silicon Valley CEOs indicated that, when Covid restrictions lift, more than 70% of participating CEOs may allow 70% of their workforce to continue working from home. Almost the same percentage of surveyed CEOs said they were reconsidering their investment in physical office space. This scale of change in Silicon Valley commercial real estate alone could have significant repercussions in other local real estate markets. Even if these two economic shifts occur and result in lower property values, that may not be enough to bring buyers into these areas.
In contrast, in locations where buying demand does increase, prices can climb, especially if the supply of modern housing is low. Real estate buyers will benefit from keeping an eye on how different locations respond to economic shifts ahead.
#4. Proximity to valued local amenities:
As a result of the pandemic, proximity to progressive, state-of-the-art, and fully-funded healthcare facilities may become an important value factor. Experts forecast a return of this virus and another pandemic in the near future. Will healthcare access become a significant location value factor?
In contrast, waterfront properties are a category of preferred real estate that demonstrates how climate change can negatively shift value. The National Oceanic and Atmospheric Administration (NOAA) forecasts an above-normal hurricane season for 2020.
CoreLogic recently released its 2020 Storm Surge Report which reveals that, from Texas to Maine, more than seven million single-family homes are at risk of highly-destructive storm surge which could amount to more than $1.7 trillion in reconstruction costs—approximately 69 percent of total storm surge damage. The higher rates of mortgage delinquencies related to serious storm damage may be compounded by Covid economic pressures. How might climate change and extreme weather affect your preferred neighborhood?
Right now buyers are faced with more questions than answers:
How will the pandemic affect the neighborhood you favor?
“Guessing” or “assuming” are poor approaches to value determination for buyers. Experienced local real estate professionals and mortgage brokers are excellent sources for relevant information on property values and how local lenders are reacting.
The Covid 19 pandemic has had serious economic ramifications around the globe.
That impact may be less significant to you than how the pandemic has played out in the neighborhood you want to buy into. Will changes to your chosen neighborhood make it less or more attractive to you? Will affordability be negatively affected or improved?
The Pandemic has not changed the way real estate value is determined, just the context of value.
In the past, proximity to work held value for many buyers. Now, working from home has come into its own. It’s working! If the major employers in your community embrace working from home as their post pandemic work model, will buyers still place extra value on living near their employer? Reliability and robustness of local internet and WIFI, along with rapid transit for occasional visits to the employer, may become key value factors.
On the other hand, if economic hardship bankrupts large employers like factories, employment opportunities will be seriously reduced and local property values may decline. How will your preferred neighborhood be valued?
Timing is significant when considering real estate statistics or data.
Pre-Covid data may not be relevant to post-Covid real estate decisions. For instance, the Federal Housing Finance Agency (FHFA.gov) produces the nation’s only public, freely available house price indexes (HPIs) that measure changes in single-family house prices based on data that cover all 50 states and more than 400 American cities.
The recent HPI release has led to “soaring prices” headlines, but these higher indexes were created using pre-Covid, March-purchase data reflecting prices set in late-January and throughout February. What will the June 24 monthly HPI report, which will reflect data through April 2020, reveal about this Covid slice of history?
What value does location hold for you and your family?
What do you want to be near? What do you want to be distant from? If what you want proximity to is what others value too, that location will carry more value and higher prices. Often in really hot spots, condominiums rule as they maximize density and location with a small building footprint and lower purchase prices.
Or, your ideal location may be a less-dense or even a rural environment where social distancing from neighbors is a year-round lifestyle. The catch is that rural medical services, supplies, and budgets may struggle to provide the best local healthcare options. Many small hospitals and healthcare clinics are suffering great economic pressure and some are failing. Would a larger, less expensive home in a location like this hold value over healthcare security for your family?