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Will Covid cause foreclosures and a fall in housing prices?

Since the 2008 housing crisis, prices and foreclosures have been a common talking point in the industry. Every time an economic scare occurs, this question pops up in some form or another.

We don’t see that happening at this time. Mortgage interest rates dropped significantly making housing much more affordable than pre-covid as most buyers buy based on what their mortgage payment will be.  Since mortgage rates dropped it has pulled buyers that might have been on the sideline or those waiting for an opportunity to step in to the marketplace. Mortgage rates created a great buy opportunity.

There may be occasional foreclosures like in Waikiki, but the evidence isn’t there for an overall wave of foreclosures. In fact, pricing is still going up in recent months due to a supply demand imbalance, meaning there are a lot more buyers in the market than sellers.

The market is in a strong position right now. It’s been on an upward run for over 8 years in terms of prices. There will be some people who go underwater and have to foreclose - but it is doubtful that this will happen en masse, not at this present moment at least.

Those who have purchased a home in the last 5-7 years have gained likely 10-20% equity in their house. If they were to lose employment, they could sell - providing a safety cushion.

Why now is different from 2008

When talking about the foreclosures and the housing industry in relation to the economy, many flash back to 2008 with worry. The simple fact is, the housing market crash was due to looser restrictions on loans. Predatory lenders would give out loans to people incapable of paying them back.  Practically anyone with a job could get a loan at that time.

Since then, stricter regulations have come into play. Lenders are now blocked from giving out loans to those unqualified. Those who have bought homes in the past ten years have done so from a healthier financial place than those who bought homes in the early 2000s.

Prices for condos and homes have actually increased from April to May. Hawaii’s situation is different from the mainland. Limited land (limited supply) inhibits development, and demand for a home in Hawaii has always been high. Even during the 2008 housing crisis, prices in Hawaii only dropped by 11% from the top to the bottom of the market over a two year period.

Over the next 3 months

 It’s true, there has been a reduction in the number of new listings coming on the market. It’s also true that there may be a drop in buyers as the situation continues. Many Sellers had been afraid to enter the market due to economic or health reasons related to Covid. Frankly speaking sellers didn’t want strangers in their home, so many people did not put their home on the market.  As the economy begins to open back up we are starting to see more listings come on the market but we expect that to normalize and get back to where pre covid listing numbers were.

We are also about to remove the 14 day quarantine period here which will allow off island buyers to reenter the marketplace for buying a home.  This should further increase demand for housing and increase the imbalance in the market.

But so long as there is an imbalance, we don’t feel like this will affect housing prices or cause a crash. Unlike the mainland, Hawaii is limited in new developments. They are carefully planned out, and must follow strict guidelines.

With new housing development limited and sellers afraid to enter the market, the current supply is low. Data is showing us that buyers are still outranking suppliers. This means prices are likely to either stay steady or continue going higher.

Conclusion

The last crash to the housing market was during the 2008 housing crisis. The wave of foreclosures that arose came from one very specific issue. Since then, stricter regulations have prevented unqualified people from acquiring a home loan.

While Covid is a serious threat, it doesn’t change that there is a market imbalance. Not yet at least.  If the economy can’t open back to tourism for an extended period of time we may have a very different conversation but given the data and evidence seen, we believe demand will continue to outpace supply and drive prices up in the near future. A wave of foreclosures seems unlikely in the current climate.

As the situation advances, that may change - but the current supply/demand imbalance comes from those living only on the island. Once mandatory quarantines end, it’s a good bet that off-island demand will cause prices to rise even further.

Regular homebuyers who maintain employment are still able to get loans to buy a home. Mortgage interest rates have been falling too. For those secure in their employment, now might be the best time to purchase a home in Hawaii.

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Scott Startsman
REALTOR-ASSOCIATE | RS-62384
614 Kapahulu Ave Honolulu, HI 96815
(808) 291-5441 
scott.startsman@locationshawaii.com 
www.hiestates.com