The coronavirus is making waves across California’s economy in 2020. As more individuals test positive for the virus, caution is catching, and panic is spreading.
In general, uncertainty is bad for home sales. Homebuyers, sellers and mortgage lenders are taking a conservative approach to the market, causing sales to grind to a halt. A situation best described as the Economics of Fear is shutting down both supply and demand across nearly all segments of the economy, including housing.
But as ripples touch every segment of the market, some positives are emerging, including lower interest rates and a boost for refinancing.
What are all the impacts, how long can we expect them to continue and what can real estate professionals do to prepare? Read on for first tuesday’s analysis and advice.
Economic impacts of the coronavirus
While the coronavirus may have been on your radar the past two-to-three months, for most, it didn’t hit home until the stock market began to plunge in late February. This happened after the S&P 500 reached a new peak earlier in February, an example of the volatility that has characterized the last month in the markets.
As a result, investors continue to leap out of the uncertainty of Wall Street into the safety of government bonds. This surge in investment caused the 10-year Treasury Note to nosedive to its lowest level on record — by a lot — landing below 0.5% on March 9. As more people find themselves stuck at home, the price of oil has plummeted. Also on March 9, Wall Street trading was halted for a quarter hour in an attempt to convince investors to keep their cool, but the S&P 500 ended up falling over 7% in its worst day since 2008.
While this is a situation that is evolving by the hour, at this point, a recession is all but certain.
In an attempt to ward off investor panic, the Federal Reserve (the Fed) dropped their benchmark interest rate by 0.5 percentage points. The Fed’s move is reminiscent of choices made immediately following the events of September 11, 2001. Even as the economy was heading toward a regular business recession, the unexpected events — then, an attack on U.S. soil, and now the coronavirus — caused investors to panic and the Fed swooped in to reassure everyone with a rate cut, making it cheaper to borrow.
But today’s situation is different, and the Fed’s moves aren’t likely to go very far in encouraging borrowing, lending or any other economic movements. Today, the coronavirus is slowing supply lines around the globe to a trickle. While demand for some commodities is higher than ever (e.g. hand sanitizer and face masks), the vast majority of consumers are closing their wallets in the face of economic insecurity.
Declining homebuyer confidence
All of this uncertainty has shaken homebuyer confidence considerably. Homebuyers are not interested in making a big financial commitment when they’re not sure if the economy is in freefall, not to mention the possibility of future job losses.
Unconfident homebuyers mean lower home sales volume and fewer fees to be had for real estate agents. California home sales volume has already slowed consistently for the past two years, falling 4% in 2018 and a further 1% in 2019. Home prices have also been essentially flat for the past year, barely keeping pace with inflation.
But there is some good news for homeowners and the few homebuyers brave enough to commit this spring. Since mortgage rates are closely tied to the 10-year Treasury Note, average mortgages rates have also declined over the past two weeks. The average 30-year fixed rate mortgage (FRM) rate hit a new record-low in the week ending March 6, averaging 3.29%.
In the end, these rate cuts probably won’t induce more home sales, as the promise of a low mortgage rate does not negate the economic uncertainty still roiling markets. But these record-low rates have already interested many homeowners in refinancing, from which mortgage brokers and lenders are sure to profit.
Of note, while FRM rates are at all-time lows, they are still not as low as they ought to be. Historically, the average 30-year FRM rate hovers around 1.55 percentage points above the 10-year T-Note. In the week ending March 6, the spread was over 2.55 percentage points. That’s because lenders, wary of the market’s future, are padding their risk premiums out of an abundance of caution. Therefore, while FRM rates certainly have the capability of falling further, lenders won’t allow them to go much lower.
Advice for real estate brokers
Plan ahead by assuming that instances of the virus will continue to worsen. Like other business owners or managers, real estate brokers who apply some forward-thinking to plan for the worst will save money and effort.
For example, make a plan with your sales agents and other employees for how they will work remotely if it becomes necessary to close the office.
Make it clear that sick employees need to stay home to avoid infecting other people. To make it an easier decision for an employee who gets sick, allow for extra sick days this spring or give sick employees the opportunity to work from home while they are contagious. The same goes for employees who have come into contact with someone with the virus.
What to do about slowing home sales?
Home sales volume reports are not yet available for February 2020, but expect to see fewer year-over-year sales in February, with the decline rapidly increasing in March, April and May. At that point, memories of the 2008 recession will begin to surface and sellers will begin to worry about getting stuck and will start accepting lower prices.
Brokers and sales agents who have already begun preparing for the next recession — expected to arrive by the end of 2020 — are a step ahead of today’s slowdown. It’s not too late to make adjustments to your practice, including expanding your brokerage services and marketing efforts. Become familiar with investment strategies that become popular during a slowdown and prepare for a slight uptick in distressed sales likely to hit the market in the coming year.