Behind real estate’s surprise 2020 boom and what comes next

Subscribe to How To Reopen, our weekly newsletter on what it takes to reboot business in the midst of a pandemic. The house-hunting bonanza that gripped many Americans along with the resilience of the real estate market has been one of the biggest surprises of 2020.  The COVID-19 pandemic, the […]

Subscribe to How To Reopen, our weekly newsletter on what it takes to reboot business in the midst of a pandemic.

The house-hunting bonanza that gripped many Americans along with the resilience of the real estate market has been one of the biggest surprises of 2020. 

The COVID-19 pandemic, the loss of millions of jobs, a weaker economy—none of it stopped millions of house hunters from flocking to Zillow, Redfin, and other online platforms to browse, plan their move, and, in many cases, purchase their first home.

Home prices have been climbing steadily over the past few months, and industry players are projecting they are likely to peak in some markets this fall, causing a tempering of the market driven by a decline in supply and a prolonged economic recovery.

Real estate companies are preparing for what comes next and what homebuying will look like in this new environment, as it will become more important to optimize their sales funnels, home in on high-value leads, and boost profitability as sales may peak in some markets.

“The more interesting thing [is] to sustain it. We can’t expect that kind of thing to continue,” Zillow CEO Richard Barton said of the market’s momentum on the company’s last earnings call. “So we have to move down the funnel to find the levers to drive the business in a sustainable way, and we have these levers all the way down the funnel that we are not yet maximizing or monetizing.”

Zillow projects home sales are “expected to peak this fall then taper off through 2021, though still staying above pre-pandemic levels.” 

New home sales jumped 43{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} in August compared with a year ago, according to Census Bureau data. In many markets, the sales were driven by demand for suburban properties by millennial and first-time buyers as work-from-home policies became the standard across many industries.

A survey published earlier this month found 63{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} of millennials, now the largest U.S. population segment, plan on purchasing a home within the next year.

This time is different

The 2020 housing market stands in stark contrast to previous economic recessions, as the COVID-19 pandemic and working from home have defined much of the market demand this year.

“There’s really no comparison to previous recessions. The housing market has done incredibly well during this pandemic-driven recession,” says Daryl Fairweather, chief economist at Redfin. “It has more to do with the pandemic itself: how everyone is stuck at home, working from home, teaching their kids from home. The home has just become so much more important.”

The country’s new house-based existence has fueled buyer appetite for more suburban and spacious properties. 

“The whole pandemic changed the way we think about work/life balance,” says John Campbell, a managing director at Stephens Inc. who focuses on real estate. “You factor in lower interest rates, better purchasing power, the millennial population coming in, the first-time homebuyers—it feels like the perfect storm, all these things influencing strong buyer demand.” 

While demographics and record low mortgage rates are likely helping to drive demand, it’s also the lack of inventory this time around that has kept house prices high.

“What could slow it down is the supply side,” Campbell says, noting that inventory is close to the all-time low.

In fact, U.S. housing inventory levels fell to a 3.3 month’s supply as of August, which represents the lowest level since 1963, according to the National Association of Home Builders.

Online and mobile app traffic has also jumped, as more people searched for new properties. Zillow hit a record 218 million average monthly unique users last quarter, a 12{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} increase from a year before. The total number of visits reached 2.5 billion during that quarter for both website and apps, a 14{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} jump. The company reported a 28{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} jump in revenue of $768 million compared with a year before.

‘Unstoppable growth’

But market analysts and industry players say current sales cannot be sustained indefinitely.  

“We have to be realistic and realize that there is a tipping point where prices go too high, and you start to see the demand…level off,” says Ali Wolf, chief economist at Zonda, previously known as Meyers Research. “The markets that we think could peak sooner, it doesn’t mean that they’re going to fall—it just means that they’re not going to see the unstoppable growth…a seemingly unstoppable growth, they’ve seen this year.”

She also projects that there will be certain markets that will see even higher sales next year.

Not everyone on Zillow is necessarily completing the transactions. The app has emerged as a national pastime, with some using it to research where their dates live or provide an escape from the pandemic blues, or as something to scroll through during bouts of insomnia. Some users don’t even have a bank account. Now the company is looking to convert its record traffic and those eyeballs into sales.

“The pandemic has been a really big opportunity for the big brokerage firms—Zillow, Redfin,—to step out as thought leaders, to educate buyers [and] then have them use their platform to search for their homes,” Wolf says. “And so we’ve seen the data that comes out of these different companies just get elevated almost each research paper; they have something more thoughtful and well researched trying to gain that market share.”

Beyond customer engagement, there is also a shift toward a digital shopping and viewing experience. 

“One thing that we did see really take off dramatically was 3D home tours, which is a feature you can add to a listing on a site like Zillow, where it creates a 3D model of the house, and you can click through to re-create the experience and sort of see how all the rooms fit together,” says Jeff Tucker, senior economist at Zillow. “Those were a fairly niche feature that only some listing agents were using before the pandemic, and the frequency with which they were added to listings just skyrocketed in the spring and has remained significantly higher ever since.”

A prolonged pandemic and work-from-home environment could further accelerate a digital transformation of the real estate industry—and a more integrated approach to revenue generation.

According to a September research note from the Arkansas-based Stephens Inc., the real estate industry is “on the brink of considerable change, a change that should result in better lender profitability, better economics for the scaled vendors, and a generally better consumer experience.”

Last month, Zillow announced plans to expand deeper into the real estate brokerage business in 2021, similar to Redfin and others. This will broaden the Zillow Offers service “from start to finish” of the customer journey.

Campbell believes companies like Zillow could one day expand to Quicken-like services.

“If you can use a little bit of technology, be faster and more efficient than the next guy, you will win market share,” he says. “That’s what Quicken has done. They literally went from a couple bits market share to the No. 1 player and unseated Wells Fargo because I think they’re so good at being online and converting customers online.”

Polarization of American dream

Despite this strong momentum, the real estate market hasn’t been uniformly good for everyone. 

There is a question of affordability going forward, which presents unique challenges for each company, prospective homeowners, real estate firms looking to broaden their customer base, and the economy as a whole.

“Affordability will actually work against the housing market in 2021,” says Wolf. “We’ve seen home prices have gone up double digits in some markets year over year, and at a certain point that home price appreciation offsets the savings from the mortgage rate.” 

And the longer the pandemic continues or the weaker the economy gets, the more of a gap there will be between those who can afford a home and those for whom the prospect of homeownership will become less and less attainable.

“So long as the pandemic goes on, I think we will see more demand at the top of the market because those are the people who are getting word from their employers that they can work from home as long as they want,” says Redfin’s Fairweather. “The delayed government response in terms of stimulus has already had a negative impact on the bottom of the market. We’re already seeing home sales decline for homes that are priced in the bottom third.”

Despite the market’s enduring drivers, there are still plenty of risks and unknowns: the outcome of the election; the two presidential candidates’ plans to reopen schools and businesses nationwide; their different views on real estate development and zoning laws; the timeline of the COVID-19 vaccine; the stock market’s performance; and consumer confidence overall.

“Any company out there that is helping embrace the new norm, anybody who’s helping bridge the digital divide, anybody who’s helping you become remote, it will do fine,” Campbell says, noting we may see an uptick in M&A activity especially as the housing supply declines further.

All of this bodes well for the real estate players, who don’t think the projected sales peak will slow them down. 

“If it weren’t for a pandemic and potential economic calamity, we could really get excited,” Barton, Zillow’s chief executive, said on the company’s last earnings call.

More personal finance coverage from Fortune:

Balmon Hyper

Next Post

What new tier 3 lockdown restrictions mean for UK small businesses

Wed Oct 21 , 2020
The new three-tier system of Covid-19 restrictions introduced by the UK government last week is now in effect. Needless to say, small businesses are likely to feel a significant impact, especially those in tier 3 areas where the restrictions are tightest. If you run a small business in a tier […]