The Coronavirus is making an impact on doing business as usual. No doubt you’re reading headlines about the turbulence in global and domestic financial markets. Silicon Valley’s real estate market isn’t immune. So, let’s explore what’s happening and what’s predicted over the next several months.
The situation with COVID-19 continues to evolve and the California Association of Realtors provided a financial update yesterday. Modest revisions were made to their article on the impact of the Coronavirus on the real estate market. Most notable are:
- C.A.R. Likely to Revise 2020 Forecast Downward, But Not Dramatically: The situation remains fluid, and conditions could deteriorate beyond what is currently envisioned depending on the severity and duration of the outbreak, but if current economic forecasts of modest declines in GDP growth are realized, the effects of lower rates should help to offset the effects of a slower economy and increased economic uncertainty such that California would still achieve a modest improvement in both home sales and prices this year.
- Wealth Effects will Impact Top End of the Market: Some shift in the market is expected as households become less wealthy, which will reduce demand for real estate. This could have larger consequences for the top end of the market, where financial market wealth is often used as a source of funds for luxury homes, second homes, and investment properties. This could lead to longer time on market and softness in home prices in the upper price segments.
- More Forecasts Have Been Downgraded This Week: Last week, we reported on the International Monetary Fund (IMF) and Wells Fargo downgrading their forecasts for economic growth by 10-20 basis points. This week, Goldman Sachs also cut its forecast to less than 1% for the first half of 2020. Although forecasters are growing more pessimistic about the impacts of the virus, it is important to note that most are still calling growth—it will just be a much slower pace of growth than originally anticipated.
- Recession Risks Increase if Consumers Lose Confidence: Not only will financial market losses impact household wealth, they have the potential to undermine real economic growth. Since the recession ended in 2010, consumers have been responsible for the vast majority of our economic growth. If consumer confidence retreats and spending dwindles as a result, the economy does not have many other sources of growth to fall back on, which could precipitate a new recession as the factory sector remains in the doldrums after taking a hit during the trade conflict with China.
- Economic Data Remains Resilient Thus Far: Consumer confidence remained relatively high in February. Although most of the survey was conducted before the virus intensified, it provides good evidence that the U.S. was on a solid footing economically prior to the outbreak. In addition, the U.S. added 273,000 new jobs, which was the fastest pace of growth in a year and well above expectations. We will have a better idea when March data begins to trickle in, but next week’s retail sales report could give us a better sense of consumers, which represent more than two thirds of the economy.
- Turbulent Financial Markets Make Real Estate Relatively More Attractive: Although lost wealth is expected to have negative impacts on higher-priced properties, the fear that financial markets could fall further could improve the prospects for real estate as investors seek safe havens for their assets. Prior to the outbreak, the luxury segment had been gaining steam with back to back increases. We will get February data on both closed and pending sales for California next week, which should illuminate the distributional effects further.
- Mortgage Rates Likely to Fall Further: The Federal Reserve issued an emergency 50 basis point cut to their target interest rates last week, and more rate cuts are expected in the coming meetings. However, more than the effect of the Fed’s actions, trends in the 10-year Treasury suggest rates may have more room to fall. Given the relatively riskless nature of government-backed loans and the current spreads between 10-year and 30-year rates, the cost of 30-year fixed rate mortgages could come down an additional 10-20 basis points in the coming weeks.
- Situation in China Beginning to Stabilize—Hope for Foreign Demand: The number of new Coronavirus cases has begun to fall in China and although the toll has been devastating, there are rising hopes that they may be getting the outbreak under control at last. This will take time to materialize in the housing market, and as we noted last week, international demand has fallen to cycle-lows in California, but this should help prevent a larger decline in demand from foreign buyers.
- Yield Curve Improves in Wake of Fed’s Move: The Federal Reserve’s emergency rate cut has garnered both scorn and praise in recent days. Some argue that the Fed acted too soon and may not have many tools available down the road when the economy needs further stimulus. However, one byproduct of the Fed’s recent move is that the yield curve, a highly watched predictor of recession, improved after the benchmark rate was cut. This means that at least some of the short-run risk was reduced.
Concern vs. Opportunity
Some buyers are hunkering down, putting their purchases on hold. Others recognize an opportunity. The recent drop in interest rates along with the spring selling season make buying a home a golden opportunity. Mortgage rates are now near a 5-year low. Savvy buyers realize we live in a premier real estate market, one that has weathered and triumphed many financial storms.
The same is true for sellers. Some sellers have decided to delay listing their property, waiting for the panic to pass. Others have forged ahead, putting their selling strategies into action.
Ultimately it’s a personal decision. Just remember that I’m a resource to help you gather the facts and weigh your options.
Data from CAR
The California Association of Realtors is monitoring the market and its impact on housing. The following excerpt provides data-supported predictions and answers to many questions:
- Forecasts Have Been Downgraded, But Few Economists are Calling for Recession Yet: Last week, the International Monetary Fund (IMF) cut its forecast for global economic growth by 0.1%, but is still calling for an expansion in 2020, albeit at a slower pace.
- Mortgage Rates Will Likely Remain Low, Or Even Fall Further As A Result of Coronavirus: The Federal Reserve issued an emergency 50 basis point cut to their target interest rates, and guidance suggests that the Fed may be open to future reductions in order to counteract the negative impacts to financial markets. This should help to reduce the cost of borrowing and make housing more affordable over the near term, which should help to offset some of the negative impacts to housing demand associated with rising uncertainty.
- Domestic Buyers May Be Discouraged By Rising Uncertainty and Recession Risk, But Is It Still a Good Time to Buy?: Mortgage rates fell to an all-time low level of just 3.13%. That is down from 3.80% at the start of the year and represents significant cost savings over the life of a 30-year loan. For buyers who can afford their monthly payments, the economic uncertainty that is driving rates lower provides an opportunity to capitalize on significantly reduced borrowing costs that they will enjoy for years to come. Short-run risks to the economy exist but are arguably offset by long-run benefits of lower rates at the individual level.
- Financial Market Volatility Could Reduce Demand For Luxury Homes, But Also Create Potential Opportunities for Luxury Home Buyers: The recent turbulence in financial markets has already impacted household wealth. This could reduce demand for luxury homes in California in particular. However, with fewer luxury buyers, there could be opportunities for price discounts for buyers who choose to remain in the market for high-end properties. Real estate may also act as a buffer against potentially larger declines in the financial markets.
- New Home Construction in California Could Slow Further, Exacerbating Already-Tight Supply: Many of the inputs to California’s Building Industry are sourced from Asian countries including China. As the Coronavirus disrupts these supply chains, the cost of those materials may increase over the short run or become limited, which will increase the cost of construction and potentially reduce the pace of new residential development below its already-lackluster pace in 2020.
- Low Rates and Fewer New Homes Constructed Should Place Upward Pressure on Home Prices: Improved affordability stemming from lower rates combined with fewer new homes being constructed as the construction supply chain is impacted could lead to more upward pressure on home prices in California. Unsold inventory is already at low levels, and reduced construction activity means that is likely to continue—especially if buyers respond to lower rates.
- Offsetting Effects Leave C.A.R.’s Housing Market Outlook Unchanged, For Now: The situation remains fluid, and conditions could deteriorate beyond what is currently envisioned depending on the severity and duration of the outbreak, but if current economic forecasts of modest declines in GDP growth are realized, the effects of lower rates should help to offset the effects of a slower economy and increased economic uncertainty such that California would still achieve a modest improvement in both home sales and prices this year.
- Eventual Rebound Will Take Longer Than It Did With SARS in 2000: At the turn of the century, the negative impact of the SARS virus began to fade within 6 months of the outbreak coming under control. However, unlike with the Coronavirus, SARS did not have significant impacts on either consumer spending or domestic financial markets. The size of the impacted population and the death toll is also much larger with Coronavirus, which suggests that the eventual recovery will play out over a longer period of time.
Buying or Selling Remains a Personal Decision
Whether you’re looking to buy or sell, you need an experienced guide in this complex and fast-paced real estate market. I’ve helped hundreds of individuals just like you successfully negotiate the most important financial transaction you’ll ever make. Contact me today to get started.