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Reading The Tea Leaves: COVID-19's Effect On Major US Urban Housing Markets

Jul. 10, 2020 7:00 AM ET
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  • The COVID-19 pandemic has hit major urban US housing markets hard, but not in a uniform way.
  • In both New York and Los Angeles, stay-at-home orders have led to a sharp decline in home sales, but both markets have rebounded well.
  • It appears that the early lockdowns in California spared the housing market there of the worst effects.
  • The spread of the virusin New York, coupled with lockdowns, had a larger impact.
  • The current uptick in thespread of the virus in Los Angeles might be instructive concerning the responseof the housing market there to renewed mitigation measures.

US housing marketRight now, real estate investors, homeowners, and analysts are holding their breath and waiting to see how the long-term effect of the coronavirus (COVID-19) pandemic on the housing market will play out in the US. As recently as one month ago, many were optimistic that the encouraging downward trend of the virus's spread would help lock in a quick recovery in the nation's largest and most important real estate markets. But now, with the virus spreading like wildfire once again in much of the country, it's starting to look like the earlier assumptions may have been premature.

The trouble is, there's no precedent for what's happening right now. And even recent attempts to use prior pandemics as a benchmark fall short because there's no analog for the kind of global economic shutdown that's come with COVID-19. So, the only potential way for investors and homeowners to know what might be coming is to look at more short-term trends to try and find some clues. In an attempt to do that, we're going to take a look at two major urban markets in the US that are at different points in the COVID-19 fight (NYC, LA) to look for useful comparisons. Let's dive in.

An Overview

The reasons we've chosen New York and Los Angeles, in this case, are many. First, they're similar in that they're crowded, high-volume markets with steady demand patterns. Second, they are, right now, at opposite ends of the spectrum in the ongoing fight against COVID-19. New York is just emerging from lockdown after having been the virus's US epicenter in early April. Los Angeles, by comparison, put stay-at-home orders in effect early, only to see their infection rate skyrocket this month.

As a result of these trends, the real estate market in these two cities have had distinctly different first and second quarters – although not as different as one might imagine. That's because there are likely three distinct effects on the markets at play here. The first is the physical limitations on home sales that came with stay-at-home-orders. The second is the short-term economic impact of the shutdown on the income of average homebuyers. And third is the psychological effect the disease may be having on those who are still willing and able to buy homes.

The first two of those effects can be quantified. The third cannot – at least not with any certainty. But it's still a useful exercise to look at the prevailing trends and how they compare.

The COVID-19 NYC Housing Market

In the New York City area, the worst of the coronavirus spikes (so far) happened very early in April. Since the virus wasn't detected there early enough to take preventive measures, the stay-at-home orders coincided with the worst days of the outbreak there. For the real estate market, this meant a near-total shutdown in sales. In Manhattan, the conditions in April translated to an 89% drop in listings year-over-year, and a price drop of about 20% from the prior year. In the outer boroughs, the drop in listings reached similar rates. Interestingly, the drop in activity didn't come with the same price drops, as prices in Brooklyn and Queens remained somewhat stable.

So, that meant most of the New York City housing market survived the shutdowns with little long-term price damage. That would suggest that a rebound in sales should come once the lockdowns came to an end. And that looks to be happening now as the data for June shows that the NYC market has climbed a little more than halfway back to normal. Judging by the early returns, that would suggest a short recovery to pre-pandemic price and activity levels by the end of July. That assumes, of course, that there's no resurgence of the virus in the city.

The COVID-19 LA Housing Market

The real estate market in the Los Angeles area and the rest of Southern California also took a hit early on in the pandemic. That's because California was the first state in the nation to issue stay-at-home orders, despite not seeing the infection trends that overwhelmed New York. But, it's important to note that they didn't fall as far as New York. In May, home sales in the Los Angeles region fell approximately 50% from the prior year. At the same time, though, prices in the area continued to rise, gaining in March, April, and May. In June, as the state emerged from lockdown, sales jumped by around 40% - all but erasing the damage wrought by the lockdown.

The trouble is, unlike New York, the LA area is just now starting to see a big jump in coronavirus cases. That's leading to renewed shutdowns that could last for months. It also means we're about to find out the difference in impact a growing outbreak will have on the LA market compared to the earlier shutdown-only effect. If the same trends that were seen in New York happen in the LA area, we should see home sales and prices start to decline. If that happens, it will demonstrate a tentative link between the fear of the virus and a real decline in sale values, coupled with a knock-on effect of even fewer sales.


Although it's still too early to get a complete picture of what's happening (after all, this is short-term incomplete data in a very fluid situation), it may be worthwhile for market watchers with interest in the NYC housing market to keep a very close eye on Los Angeles right now. If it looks like they start to see similar sales and value drops to what happened in New York in May, it should confirm that the lockdowns and the actual path of the virus are having two distinct effects on the market.

The takeaway of that would be instructive for the New York Side of the equation. It would mean that as NYC starts to reopen, successfully preventing a second wave of the virus will have an outsize effect on the housing market. It would also suggest that it would be more than worth it (to the housing market, anyway) to return to a lockdown rather than allow the virus to spread anew. Using LA as a benchmark, it looks like that would result in a smaller short-term downturn.

Of course, this all depends on what happens in the coming months in LA. And it also doesn't control for the trends surrounding people opting to relocate out of cities in response to the ongoing pandemic. If those trends accelerate, it would exert a significant downward force on urban housing markets, including in NYC and LA. But those trends, unlike the effects of the coronavirus, will take months or years to be able to measure.

So, in the short term, we can draw some potentially useful conclusions, including:

  • Proactive lockdowns are far less damaging to housing than reactive ones
  • In either case, rebounds should be sharp and short

The bottom line here is, the urban property markets seem far more resilient than anyone expected. They haven't collapsed, they've rebounded well, and prices don't seem to be in danger of freefall. Still, it looks like the LA market might be a useful test case to tease out the effects of all of the different forces at work here. So, stay tuned.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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