Posted on April 15, 2020 in Market Analysis

Novel Coronavirus

With the coronavirus still spreading like wildfire across the US, the overall outlook isn’t looking bright for the real estate market.

Once thought to be a hedge against economic and political instability, the real estate market is being absolutely clobbered by the coronavirus pandemic. The novel coronavirus now accounts for 26,000+ deaths at the time of writing, with new numbers pouring in every other day.

Social distancing may help flatten the curve and buy our researchers time until they come up with a vaccine, but millions of Americans are now out of a job. And one of the direct impacts of unemployment is the inability to pay mortgage and having low (or nonexistent) disposable income.

In order to adjust to social distancing requirements, real estate agents are now offering 360 degree virtual tours and video walk-throughs instead of open houses. Some real estate agents are also using various electronic tools and mobile apps to sign important documentation. These measures, as coronavirus-proof as they may seem, won’t really stimulate financial activity in the real estate market. 

 Let’s take a closer look into how the real estate market is faring.

House Sales Have Dropped Like No Other

Zillow conducted an interesting study on past pandemics and their effect on home sales in different parts of the world. Their study analyzed real estate sales during the SARS and MERS outbreaks that hit Hong Kong and China respectively. The data shows that real estate prices did not budge (at least not too significantly), but their volume of transactions went down to 72%.

This makes sense because people practiced more social distancing which resulted in fewer transactions. In other words, the pandemics put the real estate market on a temporary pause.

What’s interesting to note is that the numbers snapped back to pre-pandemic trends once the pandemic in Hong Kong and China was over.

We’re noticing a similar trend play out in the United States as the housing market data parallels the numbers seen in Hong Kong. Internet traffic to real estate databases like Redfin and Zillow have gone down by as much as 40%. New listings of homes for sales have plummeted by as much as 70%. Moreover, weekly mortgage applications have also dropped by 17.9%.

Data also shows that COVID-19 is affecting different cities depending on their local conditions. A recent report published by ATTOM Data Solutions found that Florida and Northeast housing markets might be most vulnerable. In comparison, the Midwest and the West Coast have a better chance of surviving COVID-19. Boston has fared considerably better as their single-family home units are showing steady sales.

While the 2008 financial crisis saw the housing market crashing down in tandem with the stock markets, this behavior likely won’t be seen in the case of COVID-19 because pandemics are fundamentally different than economic recessions.

Moreover, the housing market isn’t tied to highs and lows in the stock market. Most people don’t buy houses from an investment point of view. Housing, for all intents and purpose, serves a basic need. A recession, and indeed, a pandemic, does not change the need to move in and buy a new house.

Homebuilding During the time of COVID-19

Homebuilders are forced to face a completely different set of challenges. Not only do they have to contend with dwindling demand but they also have to make do with disrupted supply lines. The coronavirus has completely ruptured the supply-side of things because most homebuilders import their raw material from China (which accounts for at more than 30% of the material that they use).

NAHB interviewed many real estate agents about sales performances of homes during the COVID-19. As expected, at least 81% of interviewees claimed that the novel coronavirus has adversely impacted home-based transactions. Moreover, 54% of interviewees complained about a shortage of materials needed to complete their housing projects.

How is the Commercial Sector Faring?

The commercial sector in real estate is hemorrhaging money as key players Simon Property Group and Seritage Growth Properties register record lows of their shares. In fact, the price for Simon was $140.78 on February 24, 2020 but slumped to record lows of $52.26 only a month later. Seritage, which had a share price of $37.23 crashed down to $7.82 as seen on 24 March 2020.

REITs (real estate investment trusts) aren’t doing good as a whole.

Warehouse Spaces Are Looking Good

The real estate market for warehouses is only slightly affected because of temporary disruptions to the overall supply chain, but the overall outlook for this market sector is looking pretty good. This is because people will continue to shop online using ecommerce solutions such as Amazon and Walmart. To cater to the surge in demand for their services, Amazon has opened up a whopping 100,000 new jobs.

It goes without saying that similar trends will be observed with e-commerce giants like Walmart. This means that companies will seek more warehousing space, which will drive up sales.

Office Sector – Hardest Hit by COVID-19

Many employees are now either laid off or being asked to work from home. It can be argued that for now, most businesses no longer have the need for office space. But once the epidemic runs its course, those same offices will be filled with workers again. This also brings up an important question: will work-from-home trend stay strong long after the COVID-19 pandemic?

Many employees will likely use their positive experiences of work-from-home to convince employers that they are far more productive and efficient when at home instead of at their offices.

It is just as important to observe the job growth rate. If more people continue filing for unemployment as a result of being laid off, we may end up experiencing another recession and the demand for office space will go down. It is worth noting that the market for office space return to pre-pandemic rates once the pandemic is past us.

Understanding the Coronavirus’s Impact on Mortgage Rates

Since the coronavirus outbreak, the Federal Reserve has rolled out two emergency interest rate cuts that bring the yield on Treasury bonds to near 0%. The stock market crash, which is an utter and total disappointment for investors, will also influence interest rates.

Because investors are less likely to think about the stock market any time soon, they will end up selling their bonds and stocks. This will have the effect of pushing the prices of bonds, which in turn, will reduce the interest payment. Once this happens, the mortgage rates go down too.

That being said, it is too early to see if this inverse relationship between bonds and stocks will reflect in low mortgage rates. This number still largely depends on whether mortgage lenders want to go lower, regardless of the decision of the Federal Reserve.

Get In Touch With Barbie King to Learn More

If you want to learn more about the real estate market and what you need to consider before buying a home, then feel free to contact me. I specialize in the Indianapolis real estate market and can help you find the best real estate listings in the area. From pricing the home correctly and negotiating on your behalf to conducting home inspections, I can assist you throughout the purchasing process and enable you to buy your dream home faster than you may think.

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