Will Philly’s hot real estate market return after coronavirus?

Many in the Philadelphia real estate community have provided thorough and pro-active outlines of public health and safety measures to consider during the current COVID-19 situation, as well as discussing the benefits of virtual tours in this climate. 

The next key topic to discuss is - how will coronavirus affect Philadelphia real estate prices?

In order to help homebuyers make more informed decisions, the Prevu team has summarized the key questions we’ve been hearing from Philly homebuyers right now.

What are Philadelphia home buyers asking about during coronavirus?

• How does this compare to prior crises?
• How will this impact Philadelphia real estate prices?
• Should I buy a home now or wait?
• Will there be more inventory available after coronavirus?

How does today compare to prior periods of economic disruption?

Comparisons to historic data can be extremely helpful in determining patterns. In the midst of the current coronavirus COVID-19 situation, what historic data should Philadelphia homebuyers look to for comparison?

As Philly residents are confined to their homes due to Governor Wolf’s stay-at-home orders, it is not surprising that any talk of recession will trigger uneasy memories of the last recession in 2008. That begs the question -- is 2008 a fair comparison to today?

The Great Recession of 2008 was the crisis of its day. It was a period of economic uncertainty caused by a housing and mortgage crisis, and what made it unique was the threat it posed to the overall existence of the US banking system.

Today, the current coronavirus pandemic is not an existential one for financial markets. There will be a period of economic disruption for businesses until the coronavirus cases curve flattens. However, banks are much better capitalized compared to 2008, plus federal, state and local authorities are providing unprecedented levels of stimulus to Americans to combat the social distancing disruptions. 

For context, the current federal response totals over $2 trillion for the Coronavirus Aid, Relief, and Economic Security Act (CARES), significantly larger than the Troubled Asset Relief Program (TARP) during the financial crisis which totaled over $700 billion.

The comparison with greater similarities to today might possibly be the economic reaction to the 9/11 terrorist attacks. The industries most negatively affected immediately following 9/11 included airlines, hospitality, retail, and restaurants. The same reactions we are seeing today.

But what is in store for home prices in Philadelphia?

What happened to real estate prices during prior US recessions?

To get a better understanding of potential real estate price reactions to a recession resulting from coronavirus, we looked at the past five recessions for insights.

Residential real estate prices did not significantly drop during normal recessions such as 1980, 1981, 1991, and 2001. 

What is considered normal? As discussed earlier, since 2008 was an existential crisis for financial markets and not a "normal" recession, it is not the best comparison.

While it is still too soon to tell, Philadelphia home buyers may not see price drops like the nation experienced in 2008.

Philadelphia real estate prior to coronavirus

Prior to the arrival of coronavirus in the United States and Pennsylvania, the Philly real estate market was at record highs with an historically low level of inventory available. In fact, as of February 2020, the median sales price in the Philadelphia Metro Area increased for the nineteenth straight month.

During that nineteen-month period of expansion, and before it from 2012 to present, Philadelphia has experienced strong fundamentals with demand outpacing inventory. Despite all the new construction that has popped up all over the city, median pricing has risen.

Historically low mortgage rates, despite consistent market activity across all strata of price points in Philadelphia, were attracting tremendous buyer interest in the city, including empty nesters moving back into the city and downsizing from the suburbs, as well as out-of-towners from DC and NYC. 

Finally, the famous Philly "brain drain" seemed to be reversing as many students were electing to stay in the City of Brotherly Love post-college or graduate school due to Philadelphia’s world class amenities, cultural institutions, restaurants, parks, location within the US and employment opportunities.

The current period of waiting for Philadelphia home prices

For the Philadelphians who have been eager to buy their home after years of diligently saving up for the milestone of becoming a homeowner, it is likely frustrating to have to solely rely on virtual tours or listing photos to get a sense of a property.

That’s not to say that deals aren’t still getting done. Contracts are being signed during the current crisis, albeit at a much slower pace. Many deals that are being consummated are negotiations on homes visited before the stay-at-home order, or site unseen offers from local investors and opportunistic developers.

Little to no new inventory is coming on the market at the moment, and there will be a slowing of new construction available for delivery in the short term due to the halt on all non-essential business activity like property development. 

Philadelphia real estate after coronavirus

Will the strong fundamentals of Philadelphia real estate bounce right back after this temporary coronavirus disruption or not? It will depend on how long the shutdown lasts.

If there is a temporary disruption of only one to two months, buyers are unlikely to see much in the way of price cuts in Philadelphia due to an already tight inventory of homes for sale. 

Short term, it is likely that pent-up demand will be a stabilizing force and may even create an upward pressure on values due to competition.

If a prolonged disruption up to six months or longer occurs, the risk of more severe economic conditions increases and would likely create headwinds for Philadelphia real estate, including more persistent unemployment claims and a potential softening of buyer demand.

While restaurants, hospitality, retail, tourism and, let’s face it, most employment sectors, are experiencing contraction over the past month, Philadelphia is well positioned to contract less than other markets and rebound more quickly due to Philadelphia’s core competencies. The famous Philly "meds and eds" (referring to our best-in-class hospitals, health system and educational institutions), as well as big pharma, biotech and telecom will help shape a formative rebound for the Philadelphia Metropolitan Area.

Should I buy a home now or wait?

People always need a place to live, and changes in life create a need for different types of homes, regardless of a crisis. After not being able to see properties, as is the case in Philadelphia and much of the country, there is a strong possibility that there will be a discernible surge in activity when people are no longer confined to their current homes by governmental order. 

Whether they need more space for a growing family, want to buy their first home, or desire to start life together as a couple in a new high-rise condo in Center City, Philadelphia homebuyers will continue to buy for the stage of their lives. 

"Based on our conversations with clients, there are two mindsets of home buyers right now in Philadelphia," notes Todd Hovanec, Director of Real Estate Services in the Greater Philadelphia Area for Prevu, "Some folks are eager to resume their home search, especially after noticing everything they don’t like about their current place being stuck at home. While others are waiting for the return of a greater sense of normalcy to consider a home purchase again."

Will Philadelphia real estate inventory remain tight or rise?

Prior to the coronavirus outbreak and subsequent city shutdowns, Philadelphia real estate inventory was remarkably tight. In late 2019, Philadelphia had approximately 3.7 months of inventory available, a far cry from the highs of approx 17.2 months following the financial crisis.

While some industry professionals believe there is a wave of listings waiting in the wings to flood the Philly market as the spring selling season was delayed this year, it will be interesting to monitor the initial new inventory levels post coronavirus. How eager will sellers be to list as the uncertainty abates?

It will be a chicken or the egg problem at first. Will sellers strike first by rushing to the market or will buyers step in first in a feeding frenzy of pent-up demand for the low level of available inventory? 

We anticipate that buyers will act first based on our conversations with clients. Buyers will be able to narrow down properties online and selectively re-engage their home searches once the virus subsides. Sellers on the other hand will likely be slower to react as they have to make the more stressful decision to allow a multitude of people into their home for showings and open houses if they list. 

Ultimately, as the dust settles and Philadelphia gets back to work, will it be a delayed spring selling season or a hot summer selling season?

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Prevu is the real estate technology company on a mission to save people money when they buy a home. Our Smart Buyer™ Rebate makes it possible for Philadelphia homebuyers to receive a commission rebate of up to 2% of their purchase price with a seamless, digital buying experience and the expert advice of a dedicated local agent.