Five Findings the Data Suggests About Covid-19's Impact on the Reno-Sparks Real Estate Market
/You have probably heard many opinions about the impact of Covid-19 (and its economic effects) upon the Reno-Sparks real estate market. Some are good, some are bad, and many are just echoes of what others have said. It’s hard to find reliable analysis. I’ll throw my opinions into the mix.
I have found the only way I can make sense of market trends is to review the data myself. Often, I have to compile or re-sort the data myself to understand it. For this post, my primary source of data is the Northern Nevada Regional Multiple Listing Service (“MLS”). These numbers include single-family homes, manufactured homes, and condominiums in the Reno-Sparks area. Outlying areas such as Lake Tahoe, Fernley, Carson City, and Douglas County were not considered. Nor were multi-family listings.
Here is the state of the 2020 Reno-Sparks Real Estate market expressed in the following five visualizations:
Chart 1. Listings Per Week. This first visualization depicts the number of listings in the Reno-Sparks area, week by week, for the first 18 weeks of 2017, 2018, 2019, and 2020. A listing is when a new home comes on the market and becomes “active” on the MLS. These listings include some, but not all, of the new construction lots actively being sold by home-builders. The MLS recently made a significant change in its MLS input policies that impacts (for the better) the way these numbers are reported and will make it easier to collect accurate daily listing numbers. (I won’t bore you with the details).
Chart 2. Contracts Per Week. This second visualization depicts, week by week, the number of properties in the Reno-Sparks area where a purchase agreement was entered (going “into contract” or “into escrow”). Many people focus on closings (when the listing is marked as “sold”). Sales data for today, however, only tells us what buyer activity was 30 to 45 days ago when the parties negotiated the terms of the purchase. To know what buyers are doing today, you need to look at the contracts being entered today.
Chart 3. Listing “Build-Up”. The third visualization depicts the relationship between the number of homes listed each week compared to the number of homes that go into contract. The laws of supply and demand govern price. For the last four to five years, demand has been high and supply has been very low. That is a recipe for happy homeowners, frustrated buyers, and increasing home prices. This chart shows the number of new listings per week, less the number of homes that “go under contract”. When the number is high, it means a lot of homes entered the market and not nearly as many went into contract. When the number is below zero, that means more homes went under contract than were listed, leaving less homes active on the market at the end of the week than at the beginning. When listings “build-up,” there is more for buyer to choose. So remember = large number = good for buyers; small or negative number = good for sellers.
Chart 4. 2020 Residential Inventory. This fourth visualization shows daily inventory for the Reno-Sparks residential market. This measures how many homes are actively available for sale on that date. As previously mentioned, this covers only the Reno-Sparks market (everything from Rancho Haven to the southern tip of Washoe Valley, east to Lockwood, and west to the California border). It includes single-family homes, manufactured homes, and condominiums, but not multi-family homes. Each daily figure includes newly listed homes, as well as homes that have been listed for years.
Chart 5. 2020 Active Inventory vs. Homes in Escrow. This fifth visualization compares active inventory on any given date compared to the number of homes “in escrow” (under contract). A sign of an extremely low inventory market is that the number of homes in contract exceed the number of homes actively for sale. The “absorption rate” of a market (the time it takes a given listing to be “absorbed” by a market is extremely low in such situations. From mid-January until late-March, this was the case.
So what are five things this data tells us about Covid-19’s impact on the Reno-Sparks market? Some may be obvious and some may surprise you.
1. Covid-19 dramatically suppressed the number of sellers who listed their home in Reno-Sparks.
The data depicted in Chart One shows that significantly fewer sellers placed their home on the market compared to what would be expected at this time of year. For example, last year, 298 homes were listed the last week of April. In contrast, only 128 homes were listed during the same week this year. 2020 started very slowly in the number of listings, but by the first two weeks of March, the number of listings exceeded any of the prior three years. That dramatically changed in mid-March when the seriousness of the pandemic was realized, when sports leagues were cancelled, and when the stock market plummeted. This is not a surprising finding given homeowners’ desire to not have their homes exposed to strangers, stay-at-home directives chilling buyer activity, and an outright ban on showing tenant-occupied homes or conducting open houses. (I did make one data adjustment I should note. In the week of April 19-25, a prominent Realtor in town who lists Toll Brothers’ and Lennar’s new construction listings (as well as many resales) switched brokerages. Under MLS and RSAR rules, he had to withdraw his listings and relist each property. So there were 70+ new listings and 70+ withdrawals as a result. I eliminated those and they are not reflected in my numbers).
2. Covid-19 also dramatically reduced the number of contracts entered, at least for the months of March and April.
Likewise, the number of contracts entered in the months of March and April were dramatically less than 2017, 2018, and 2019. For example, in early April of 2019, 216 contracts were entered. In contrast, during the same week in 2020, only 98 contracts were entered. Covid-19 has suppressed the number of contracts significantly. Please note that contracts that fell out of escrow are not included in these numbers, which further contributed to low contract figures in 2020. The dropping numbers beginning mid-February likely reflects that a larger-than-usual number of contracts fell through beginning in mid-March when many buyers experienced market fear, work furloughs, and loan disruptions. Subsequent stay-at-home directives and virus fears significantly chilled buyer activity.
3. Listings began to build up in March and inventory increased, but inventory has remained low all year.
Covid-19 afflicted Reno at a time when the market environment was extremely low-inventory and very seller-friendly. As Chart 4 and Chart 5 show, inventory started the year sub-1000 (very low, and lower than most of 2019) and dropped significantly through late February. As Chart 5 shows, there were more escrows than active listings until Covid-19’s impacts begun. Prior to Covid-19 making its presence known, many Realtors observed that our “Spring Rush” began in January. That was my experience. Buyer activity was significant, inventory was very low, and there were many multiple offer situations. The chill on buyer activity brought about by Covid-19 caused inventory to rise, and through March and April inventory rose by nearly 400 homes to exceed 1,000 homes on the market on any given day. My morning routine includes checking and documenting the active inventory for the day. The lowest number I’ve documented in 2020 was 721 on March 4. Inventory peaked on April 25 at 1,067, but since that time has slowly declined and even occasionally dropped under 1,000. Even inventory over 1,000 is still very low, however. For example, at many times in late summer and fall over the past four years, inventory exceeds 1,700 homes (which is still considered a seller’s market). In short, as of yet, Covid-19 has not created a glut of unsold listings and the market absorption rate remains low.
4. Buyer activity has begun to increase fairly substantially while the number of listings remains low.
A potentially surprising finding this data yields is that buyer activity has significantly picked up over the last several weeks. In fact, the number of contracts entered last week came three short of 2018’s total for the same week. Over the past three weeks, more homes have entered contract than have been listed. By my calculations, 31 more homes went into contract last week than were listed, in a week when the number of listings relative to the number of contracts usually soars. In short, right now is a good time to sell.
5. If you are hoping for substantial price reductions, your hopes have not yet materialized.
Several people I have spoken with have suggested that perhaps this is a prime opportunity to achieve a significant price reduction. The data does not support this conclusion. Even though the number of contracts has dropped, the number of listings has also dramatically dropped, so inventory remains very low and competition remains high. Anecdotally, I have encountered numerous multiple offer situations since Covid-19 seized the public’s attention. Some potential buyers in Reno have stepped away from the market as a result of job loss, work reduction, or portfolio depletion; fear of the economic outlook; determination to not contract or spread Covid-19 during government-issued “stay-at-home” directives; or if business’ expansion plans involving Reno have been scuttled as a consequence of the looming recession. However, many buyers whose income has not been affected still actively look. And many of them are purchasing homes. Because many homeowners perceive this is a temporary cessation of economic activity, they are not considering jobs in other markets that would force them to sell their home. Moreover, government programs and mortgage forbearance programs, flawed as they may be, appear to have buoyed distressed homeowners sufficiently to avoid default thus far.
6. There are many unanswered questions.
I am by no means suggesting everything will be smooth sailing for the rest of the year. These are the biggest unanswered questions I will be watching and endeavoring to answer as the year proceeds.
Are there more buyers or more sellers waiting for an opportunity to list or purchase? There is likely substantial pent-up real estate activity which, while currently suppressed, has been merely delayed, not cancelled. When buyers and sellers feel comfortable participating again, there will be a flurry of activity. The key question is this: will more buyers or more sellers show up? The side which shows up in greater numbers will dictate the real estate market for the rest of the year. Presently, buyer activity remains higher than seller activity. I have typically been fairly listing heavy, but right now, I have a lot of prospective buyers and not nearly as many prospective sellers. (If you fall into either category, please call me!).
Will there be a glut of tenant-occupied listings placed on the market when Nevada’s stay-at-home, rent forbearance, and non-eviction directives are lifted. Presently, while tenant-occupied listings can be listed, they cannot be shown, even if the tenant would allow showings. This makes it harder to sell a tenant-occupied homes. Moreover, a number of landlords are dealing with tenants who have failed to pay rent in April and May and tenant’s remedies are limited under current directives. The impacts of Covid-19 on the rental and investment property markets are still uncertain.
How quickly can businesses re-open and return to sufficient levels of revenue to rehire laid-off or furloughed employees? Additionally, can government relief stay ahead of the devestating financial impact of being out of work? As discussed, one of the reasons Covid-19 has not created a glut in listings is that few homeowners are in distress dire enough to compel them to sell their home. If the economic effects of this pandemic drag on, however, and mortgage-paying homeowners continue to suffer income loss, this situation could change.
Will interest rates, volatile as they have been, remain extremely low for both purchases and refinances? Most economic projections I have digested suggest rates will remain low through the rest of the year. This will likely impact inventory in two ways. First, financed purchasers will have motivation to purchase to take advantage of excellent rates. But second, I suspect low rates will keep inventory low because many prospective sellers will opt to take advantage of great refinancing rates and hunker down in their present home for the time being.
How will new construction react to the Covid-19 economic slow-down? Although the number of new construction starts is still insufficient to meet projected demand, there are some significant projects in town. Builders like Toll Brothers, Lennar Homes, D.R. Horton, Jenuane Communities, and others have many lots to sell. This will be a separate post next week.
Will the mortgage lending industry remain strong? One of the less reported contributors to significant market fear and failed escrows in mid-March was a massive rush on mortgage refinances in early-to-mid March. Around the same time the stock market was plummeting and millions of businesses were tapping their lines of credit in anticipation of stormy days ahead, the lending industry experienced a brief liquidity crisis because so many loan applications were submitted (largely for refinancing due to historically low rates) that there was just not enough money for lenders to lend. Some buyers experienced surprising loan denials because the lenders could not find the money to lend. Federal action has largely stabilized the industry and I have not heard of such problems for a month-and-a-half, but with the balance sheets of many lenders and note-holders being beat up right now and the massive economic impact of this pandemic continuing to unfold, the health of the lending industry is something I watch with great interest. A healthy lending industry is essential to a healthy housing market.
Will the disproportionate impact of Covid-19 on urban centers and accompanying big-state policies (particularly our neighbor, California), motivate homeowners in California contemplating a move to less congested and far more tax friendly Reno to follow through and relocate? And will the California real estate market remain strong enough to allow Californians to continue to be able sell their homes at the needed prices to fund their purchases in Nevada? This is especially important for Reno’s luxury market. Anecdotally, I am hearing the Bay Area remains strong despite substantial showing restrictions.
How quickly will companies be able to quickly ramp up operations and revenue to resume hiring new employees from out of state? Conversely, how many employees attracted to the state by new job opportunities with few connections to Reno will return to their place of origin if lay-offs and furloughs persist?
Will there be additional “waves” of virus outbreaks later this year that could erode consumer confidence?
Will homeowners or renters who have been trapped in a home with family members or roommates for multiple months be motivated to purchase a larger home?
