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Report: Demand Is Up, Supply Is Down, Investors Challenged

[Updated: Nov 17, 2020] Jul 21, 2020 by Marc Rapport
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The pace of home sales has dramatically picked up since the depth of the pandemic-induced housing slump, but much depends on where you are, according to a new report from Clever Real Estate.

And rather than creating a buyer's market, as initially expected, the combined effect of reduced supply and low interest rates has created an especially challenging environment for investors, says Francesca Ortegren, data scientist for the nationwide residential real estate platform.

"Interestingly enough, we initially predicted the coronavirus would be a good time for investors to buy because we assumed a slowdown in the market overall that would lead to lower prices. But that's not how it played out," she told Millionacres after the release of their latest report: Home Buyer Demand During COVID-19: Metros with the Best Rebounds and Worst Drop-offs.

Albany leads demand up, Cincinnati leads demand down

The Clever data scientist parses markets using her firm's Housing Demand Metric, which she says uses Redfin (NASDAQ: RDFN) data for her to standardize and rank metros on the percentage of homes on the market for two weeks or less, median days on market, and contract ratio -- the percentage of pending sales to active listings.

The new report uses the week of April 6 as the base point for when the U.S. saw the lowest housing slump. The percentage of homes sold within two weeks then was 16% lower than during that same week in 2019, the Clever report says. Fast forward to June 15, and the percentage of homes selling within two weeks on market was 34% higher in 2020 than that same week in 2019.

The top five markets in terms of demand increase are in descending order: Albany, Houston, Harrisburg, Dallas-Fort Worth, and New Orleans. The markets that saw the largest decrease in demand were, again in decreasing order, Tulsa, Salt Lake City, Tucson, Virginia Beach, and Cincinnati.

"Staggeringly low" inventory and a return to bidding wars

In an email interview, Ortegren attributes the increase in buyer demand versus seller supply to a few things: "First, potential sellers are concerned about a lot when it comes to the coronavirus-related lockdowns and have put off selling homes, so inventory is staggeringly low and hasn't increased through the summer months as it typically does.

"On top of that, buyers have a huge incentive to buy with the extremely low (and continuously lowering) interest rates lately, so buyers aren't shying away from the market like sellers. With high demand and low supply, homes are selling really quickly and for higher prices."

That, of course, has led to the return of competition among buyers in many markets. "Right now, buyers have to make quick decisions about purchases, are more likely to get into bidding wars, and aren't getting great deals on price," Ortegren says.

Vaccines, treatments, and especially low interest rates

The Clever Real Estate researcher says she expects inventory overall to remain low until uncertainty about the pandemic eases.

"As the spread slows and/or vaccines or treatments become available, we should see available inventory increase, which should slow the speed at which homes sell," she adds.

It's also possible that interest rates will begin to increase, which might de-incentivize buyers, Ortegren says. But in the meantime, it's an interesting dilemma for investors who are seeking return rather than residence in their homebuying quests.

The investor's perspective: a risk of minimal reward

"For those looking to purchase property to resell quickly or to rent, finding a good deal or undervalued home might be difficult right now," Ortegren observes.

"Purchasing a long-term investment (like a rental property) might not be the smartest choice right now because prices are inflated by the lack of supply and high demand we're experiencing right now," she adds. "There's a greater risk that those prices will drop in the coming years and the home will lose value."

But maybe a good time to flip out

Ortegren does say this market lends itself to house flippers with a nose for a bargain and a good sense of timing.

"It might be a good time to buy with the purpose of a quick resell, since listing prices are not only higher than they were this time last year but have continuously increased throughout the year," Ortegren says.

She expects those prices to continue creeping up, barring unforeseen drastic changes in the pandemic's progress.

"Assuming nothing drastically changes in the next few months with regards to the coronavirus, I'd expect those prices to keep creeping up," Ortegren says. "So, if you can find a good deal on a home, maybe make some updates quickly, and sell it in a couple of months, people will probably be able to turn a profit right now."

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Marc Rapport has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Redfin and recommends the following options: short November 2020 $35 puts on Redfin. The Motley Fool has a disclosure policy.