What Will The Pandemic’s Impact Be On The Real Estate Market?

The pandemic has already caused a mini-exodus out of New York City, and with lower taxes, lower interest rates, and — for the wealthiest among us — higher earnings thanks to stock market gains and some helpful bailouts, the housing market is roaring outside of urban America.

What will be the impact on real estate here, once the pandemic is finally in the rear view mirror?

That’s a question UBS real estate analyst Jonathan Woloshin took to task in an August 28th note to clients titled “Covid and real estate: a simple question with a complex answer.”

One of the key takeaways in the report was forced lockdowns had those who could leave New York City ultimately leave it, if even just temporarily. And then massive and continuous protests have turned those people off into returning. Another caveat not mentioned in the report is a New York public school system that is becoming more focused on equity of outcomes for students and, in some districts, looking to do away with gifted and talented programs that allow for low and middle income parents to send their kids to the best New York has to offer its public school students.

Many real estate investors — particularly those in commercial REITS — are grappling with questions around which changes are cyclical, which changes are structural, and what are the ultimate implications of these trends are going to be post-pandemic.

“The single-family housing market has been a clear, if somewhat unexpected, beneficiary of Covid-19. Given the shelter-in-place restrictions, the shuttering of many of the key draws in a number of cities has, for the current period, made dense city living less appealing for a number of people,” says Woloshin. “The recent increase in social unrest and large-scale protests in several cities is likely exacerbating the level of urban flight,” he wrote.

Home sales in the suburbs of New York and on the outskirts of other urban hubs has increased. The supply and demand equation has made it a seller’s market almost everywhere, especially in the northeast, parts of Florida and in northern California.

The sales and order data from the public homebuilders, as well as anecdotal data from local realtors, points to a robust housing market going into the fourth quarter.

Not everyone leaving big cities plans on staying away. Some have just left to work from home at their second homes on the beach or in the mountains of the Berkshires and in Vermont, for example. Others who had the cash, or had already paid off their mortgage, chose to rent homes from the coronavirus epicenters. Unless they become buyers, these people will return to their old homes.

How many go back is the question for big cities like New York. Governor Andrew Cuomo actually asked New Yorkers in the Hamptons to return to New York City. He jokingly said he would cook them dinner.

The coronavirus pandemic, which was first discovered in China back in December, has hit the U.S. the most. Millions have contracted the virus and over 180,000 have died.

Expensive real estate states — New York, New Jersey and California — where the top three most impacted states. People that have moved on are finding there are states with significantly lower costs of living in terms of real estate costs and taxes — whether it’s in Naples, Florida or Nashville, Tennessee.

These states are also business friendly and have better fiscal outlooks, meaning the threat of tax hikes is low.

“The lower-tax states have been the beneficiary of the population market share donation from higher tax states,” says Woloshin.

The net loss of population has its consequences.

One of the biggest concerns is taxable income. It’s mostly the high income earners who are leaving. If they are leaving the school system, that’s less money for the schools. If they are leaving their businesses behind, that’s less tax revenue unless someone picks up the slack. If it’s New York City, odds are good that someone will. It just won’t happen overnight.

“Losing high-income earners, those who generate large capital gains, and those willing to make substantial capital investments can put a given city or state in a vicious spiral,” Woloshin wrote. “The states that are ceding high-income earners are going to be faced with rising personal and real estate taxes, more strains on their fiscal and operating budgets, and could ultimately lead to further population outflows.”

This post first appeared on Forbes.com. To see the original, click here.