But the pandemic plus work-from-home are creating winners and losers—for now. Home buyers: Proceed with care.
It’s too soon to know if working-from-home will remain an option for millions of American workers once the COVID-19 crisis ends. More immediately, though, the nationwide jump to remote working has resuscitated a U.S. housing market that had been uninspiring since the 2008 global financial collapse.
If you are one of the many people now interested in buying, selling or investing in real estate, you may want to act quickly. But look very carefully at the market before you leap. Also, be sure to ask your J.P. Morgan team to help you evaluate how buying a new home aligns with your goals and may affect your taxes.
While the housing market has generally avoided the economic devastation other industries face during the pandemic, complex dynamics are at work. Indeed, there are some clear winners and losers:
“Safety” zones—Home prices are going up sharply in the suburbs as well as in smaller U.S. cities as workers flee dense urban centers.
Rental markets—Rents are quickly deflating in New York, San Francisco, Chicago, Boston and other large metro areas. But they’re holding up well in less dense cities, including Phoenix, AZ; Jacksonville, FL; Memphis, TN; and Allentown, PA.
Rents are falling in dense urban areas
Chart that compares dense cities and less dense cities in the US average year over year rent growth
Power purchasers—The overwhelming majority of homebuyers are people with pristine credit scores (+760 FICO) and have jobs that are allowing them to weather the COVID-19 storm by working from home.
High-income earners driving the housing boom
Chart that correlates high income and FICO scores in the US
Renter pain points—The lack of a federal stimulus package could create a wave of evictions for renters across country. Also, workers in service-oriented sectors (hospitality, travel, retailing)—unable to work from home—have borne the brunt of nationwide layoffs. These workers tend to have lower incomes and weaker credit scores. They also tend to be renters, not home owners.
New single-family construction—Permitting activity, a leading indicator of home construction, is up 16% nationwide over last year in the single-family market.
Multi-family dwellings—Permitting for multifamily housing is down 28%, year over year. Especially hard hit: urban areas with a high concentration of tourism, leisure and hospitality businesses, including New York City, San Francisco, Los Angeles and Las Vegas.
Untethered—but for how long?
The popular narrative is people are fleeing large urban areas and moving to the suburbs and beyond.
However, the truth is more nuanced: As yet, we don’t know if moves out of the city will be permanent—or if big city flight will accelerate. At the moment, the vast majority of workers in dense metro areas continue to work away from their employers’ offices. In New York City, for example, more than 90% of office workers are remote, according to The New York Times. 1
Also, much depends on whether companies that have invested so heavily in the digital technologies to make remote work possible will revise their business models and real estate plans going forward.2
What we do know: in 2020 there has been a surge both in home sales and property prices in the suburbs surrounding urban centers.
Bellwethers: Manhattan and San Francisco
In these two markets and other big coastal cities, home prices are weakening at the urban core and gathering strength in the surrounding suburbs. Seemingly, many people expect the future will allow more flexible work arrangements, enabling them to live a bit further away from their city offices.
But don’t count out the large city centers just yet.
Amazon and Facebook are still betting on the Manhattan real estate market. According to The New York Times, Facebook has acquired more than 2.2 million square feet of New York City office space for thousands of employees in less than a year, all of it on Midtown Manhattan’s West Side between Pennsylvania Station and the Hudson River.3
As a point of comparison: in the wake of the 9/11 terrorist attacks, record numbers of New York City residents—and companies—fled the Big Apple. Two years later, however, jobs and workers started returning to Manhattan. In fact, over the next 15 years, employment grew faster in the urban core than in the suburbs, according to the U.S. Labor Department.
Move to the suburbs*
Maps of San Francisco and New York City that shows the migration patterns of outer city suburbs.
Buyers: three tips
If you are interested in purchasing residential property right now, consider:
- Bidding- In Manhattan or another densely populated urban market, bid at a steep discount to the listed price (as long as markets are not properly clearing the backlog of available properties).
In the suburbs: be prepared for intense competition for desirable properties from all cash buyers. Have a conversation with your financial advisors in advance of making an offer to ensure that your other financial plans are not disrupted.
- Home prices- In urban centers, home prices have probably not come down far enough for real value to emerge. In Manhattan, for example, listing prices have eased only by about 10% over the last year. More critically, demand has all but evaporated: There’s been a 91% decline in the number of homes sold, compared with last year.
For residential sales to pick up in metro areas, either prices need to fall further, or in-office work in the city needs to ramp up soon. Falling prices seem the more likely scenario over the next 12 months.
- Mortgage rates- Home sales so far this year are being aided by historically low mortgage rates, the result of the Federal Reserve easing monetary policy in response to the COVID-19 outbreak. These same low rates are expected to continue well into next year.
If you are thinking of buying real estate or refinancing a residential property, now may be the time to secure a mortgage:
Similarly, consider using proceeds from a home loan to amplify returns on another investment. Your J.P. Morgan team can help you determine if this borrowing strategy is right for you.4
Importance of structuring and planning
Following a move, how you structure new property can help improve your overall financial and estate plan and move you closer to your goals. Your J.P. Morgan team can help you address privacy, timing, and/or tax issues that might arise. If you’re considering a move out-of-state, we can help you understand what that might mean for your estate plan and what actions you can take for a successful move.
We can help
Indeed, your J.P. Morgan team can help you evaluate and invest in real estate across the United States–and around the world.
2To read more about the accelerating digitization of the U.S. economy, click here: https://privatebank.jpmorgan.com/gl/en/insights/investing/fintech-poised-to-disrupt-20t-financial-services-industry