We are in unprecedented times due to the Coronavirus. People are leaving large, crowded, urban areas for lower density areas like in Wyoming, South Dakota, Idaho, etc. Companies are currently letting people work remotely due to the virus. Fear of the virus is driving people out of high density cities like New York City and into low density areas like upstate New York. Why live with the traffic and riots of Seattle when you can live in Cheney or Spokane?
In addition, due to the economic slowdown caused by the virus, interest rates are at record lows. Further, new construction also came to a halt during shutdowns imposed by various state governments due to the virus. Potential sellers did not put their homes on the market due to a desire to hunker down and due to fears of moving during the virus. PPP and EIDL loans have become forgivable, giving free money to owners of small businesses. Unemployment benefits have been higher than normal.
All these factors combined have led to rapid increases in real estate prices, particularly in places like Spokane and throughout Idaho. Buyers are having a tough time finding homes to buy. If someone in Seattle sells their property and wants to do a 1031 exchange into a property in Cheney or the Spokane area, they Must buy something. They may be willing to forego inspections and pay substantially above asking prices. Offers have one day expiration periods. Inventory is low. Values are up more than 10 percent from a year ago. All this can lead buyers to panic, due to fear of missing out.
However, cap rates are at a record low. It is much cheaper to rent than to own in Spokane and Cheney. Cap rates tend to move in a range in any city. When cap rates are low, that means that the value of a property as an investment is low. Of course, many buyers do not care about potential as a rental property, so it is possible for cap rates to go to very low values. However, a low cap rate is an indication that values may be near a peak.
In some areas of the country, demand is slowing. For example, sales in the Rio Grande Valley of Texas slowed to a halt after reaching record-breaking highs last month, as pent-up demand from the economic shutdown waned.
Historically low mortgage interest rates, however, may pull sales forward from the future and sustain the upward trend. Low interest rates provide an additional incentive to buy, in addition to the temptation to leave high density cities for low density locations. Low interest rates tend to pull sales from the future. Buyers who were considering buying will buy earlier than they planned due to the attraction of low interest rates. The problem is that this is a temporary effect. The sales are pulled from the future and future demand will not be as high unless interest rates again go down. If interest rates stay flat, that extra incentive to buy is no longer there and demand will cool. It is hard to predict whether or when a slow down will occur.
Experts have made different predictions about real estate appreciation (nationwide) over the next 12 months. Zelman predicts 3% appreciation, Reuters 3%, CoreLogic 0.6%, and Haus -1.1%. These numbers are substantially lower than numbers consumers see from automated appraisal websites which may create unreasonable expectations.
Due to the unprecedented economic circumstances, it is a good time to be cautious. Unemployment is very high. There are businesses that will close forever.
There are currently prohibitions on foreclosures and evictions. After these prohibitions end, many people may fall off an economic cliff. Confidence may change. The outcomes of the elections may also change confidence in the economy. It is not reasonable to expect real estate values to continue to increase at double digit levels in the next couple of years.