America has long been known as a mobile society, starting from the days of the pioneers. The pandemic and the gathering recession make buying a new house problematical. What if now, for whatever reason, you need to pull up stakes and find a new dwelling? And you have to sell your old home? To answer that question, we turn to the sage Rick Kahler, the founder of Kahler Financial Group, in Rapid City, S.D.
Larry Light: Why, amid these bad times, would someone want to move?
Rick Kahler: Suppose that you retired last year, you’re ready to downsize or move to a warmer climate, and you have been getting your house ready to sell. Or suppose you recently made a career move that includes relocating to a different part of the country.
Light: Given the economic and emotional uncertainties around the COVID-19 pandemic, is it a good idea to follow through with your plans? What is reasonable to expect from the real estate market?
Kahler: My experience is that it often takes the real estate markets some time to respond to an economic downturn. What I find happens immediately is that banks tighten lending requirements, so this reduces demand as many buyers can’t get loans.
Those qualified buyers who can borrow want an immediate discount off the list price. Sellers are insulted by the low offers coming from buyers, because the comparable sales they are relying on support the sale prices prior to the downturn. As a result, nothing much happens for a few months.
Light: What about timing?
Kahler: If you need to relocate for a new job or have other strong reasons to buy or sell now, you may need to proceed with your plans and do the best you can. If you don’t have to buy or sell immediately, you might be well advised to wait a while. Several months from now, the price of that retirement home you want to buy might have fallen significantly.
Of course, the home you want to sell will drop in value, as well. Stay on top of what’s happening with home prices, keeping in mind that real estate markets vary significantly in different areas. The good news may be that the decline in your portfolio might match or be less than the decline in real estate prices.
Light: What if you wait a while?
Kahler: My hunch is that eventually the market will hit a new equilibrium. Sellers that want to sell will become more willing to sell at the new lower prices. How low those prices will go—5%, 10% or even 25% as in 2009—is anyone’s guess. That will depend on many factors, including how much damage is done to the economy before a highly effective drug or vaccine is found.
Light: There could be a medical breakthrough that will speed things up. Should this be a factor in your planning?
Kahler: What we are told is that the initial phase of this economic downturn is on par with the steepest recession and even the Great Depression. If a medical breakthrough for either a treatment or a vaccine occurs within the next few months, this might keep a depression at bay, and we could experience a “normal” or deep recession.
It would be a mistake to count on such a breakthrough, but the possibilities are there. Some researchers in England have raised the possibility of having an effective vaccine by September. The stock market rose recently after reports that an Ebola virus drug, Remdesivir, seemed to be very effective reversing the COVID-19 symptoms in 111 of 113 people with serious cases.
Even though we are in unprecedented times, there are some historical fundamentals that we probably can rely on. We know we will eventually find a vaccine and/or treatment. We know eventually we will move into a new normal.
Light: How long will moving to this new real estate normal take?
Kahler: At some point, buyers who must buy and sellers who must sell will start driving the real estate market. In three to six months, there will be new data on sales that will start to give some indication as to how low prices might go.
Lenders, buyers, and sellers may not like it, but they will eventually accept the new data as reality. In my experience, it takes about a year for a new market to develop and for everyone to become comfortable with the new normal.