The Myth of the “COVID Discount” on Home Prices

With in-person apartment showings banned during the peak of the coronavirus rampage in this year’s second quarter, New York City’s real estate market slowed to a crawl. A recent Douglas Elliman report revealed that the median price for Manhattan home sales in the second quarter of 2020 was down a shocking 17.7% year over year.

However, there are reasons to believe that such an eye-popping number was a “statistical anomaly,” Curbed reports, and the city’s real estate market is in better shape than one grim quarter has led many people to believe. The counterintuitive thinking goes like this: Without showings, fewer people have been buying and selling homes. And with fewer sales, there’s more room for distortion in home-price data.

“The decline does not (imply) a COVID discount,” says Jonathan Miller, head of the appraisal firm Miller Samuel and the author of the Douglas Elliman report. “The market was shut down by state mandate, so the activity was not transparent because there were no in-house showings allowed by the brokerage community. That’s just not enough time, so there’s been no price discovery.”

The 17.7 percent drop in sales prices suggests that a housing-market crash on the level of the 2008 financial crisis is under way. But taking one number from a report and viewing it in isolation distorts the reality on the ground, which is that New York’s housing market still isn’t fully functioning and any aggregate price data from this market should be taken with a grain of salt.

But if the market isn’t collapsing, why would the data show such a huge drop in home-sale prices? There are a few factors at play. First, Miller’s report noted that the number of home sales plunged in Manhattan by a whopping 54.1% year over year in the second quarter, so the median home price is based on a far smaller sample than usual. Second, the data highlights two fiscal quarters that saw unusual activity in the luxury market. In the second quarter of 2019, homebuyers rushed to close on homes to avoid the city’s newly enacted “mansion tax,” a one-time fee on home purchases above $1 million. This led to an above-average number of luxury-home closings in the second quarter of 2019, pushing up the median home-sale price for that quarter.

Conversely, the second quarter of 2020 saw fewer luxury closings because a lot of luxury market listings disappeared after the pandemic hit; wealthy homeowners are more likely to have the means to be able to wait to sell their homes, as opposed to someone at a median price point who has to move because they lost their job or got a new one. Luxury buyers are also more likely to hold off on making a huge investment during an uncertain period. This is a trend happening across the country, not just in New York.

Taken together, the drop from one huge outlier at the high end to another huge outlier on the low end technically shows a 17.7% drop in the median sale price for a Manhattan home compared to last year. But it’s more a statistical anomaly than a sign that the Manhattan housing market is collapsing, or that homes are selling at a discount.

Of course, if you’re shopping for a home, all this good news is so much bad news.