Ever since the outbreak of the Coronavirus from China, things have turned a little upside down. Stores are running out of food and toilet paper. Businesses are closing down, some being forced to close and only do take-out. Even the President has put limits on things such as no gatherings over ten people.
If you’ve been monitoring the situation at all, you know that with all the madness, the stock market has already taken a significant hit and this virus is beginning to affect our economy in many ways. With that being said, the question on everyone’s minds is, “Is the housing market next?”
Will the ramifications of the Coronavirus make their way into the Real Estate world?
One great article from curbed.com dives into this question. Read below for their take on the Coronavirus and the Housing Market, discussing where the market stands, what has happened in years past, and what you should be thinking about both as a potential buyer and a as a homeowner.
HOW CORONAVIRUS IS IMPACTING THE HOUSING MARKET: THE ECONOMY IS GRINDING TO A HALT. WILL THE HOUSING MARKET FOLLOW?
Few homes look their best in the dirty grays of late winter, which is, in part, why homebuying season coincides with the arrival of spring. This year, however, the crocuses that can make a house look that much nicer are showing up alongside the less reassuring news of a virus circling the globe.
The spread of COVID-19—more commonly referred to as coronavirus or novel coronavirus—has officially been declared a pandemic by the World Health Organization. It’s already claimed more than 6,000 lives worldwide. Major events and conferences have been postponed or canceled, corporations are telling employees to work from home, and the stock market has dropped almost 30 percent since February 24.
The CDC has recommended social distancing as a preventive measure for getting the virus, but if you’re already in the market for a house, all the uncertainty might have you worried about the housing market. Will it suffer a swoon similar to Wall Street?
There are almost 4,000 cases currently confirmed in the United States, and that number is almost certain to rise. The countries where the virus has hit the hardest—namely China, where more than 81,000 cases have been documented—are global manufacturing hubs that corporations use as suppliers. China’s economy has been brought to a standstill as a result of the virus, and the longer it stays that way, the more the United States economy will be effected.
Historically low inventory and rock-bottom mortgage rates would normally set the stage for a highly competitive homebuying season. While recessions normally have only a minor effect on the housing market, the coronavirus is making life and markets anything but normal.
Coronavirus already pushing mortgage rates lower
Late Sunday, the Federal Reserve announced a second emergency interest rate cut since the coronavirus outbreak, bringing the yield on Treasury bonds to almost 0 percent. Furthermore, the stock market crash can have an effect on interest rates, too.
When investors start thinking the stock market is too risky—like right now—they sell their stocks and buy bonds. The increased demand pushes the price of bonds higher. The higher the price of bonds, the lower the interest payment—called the yield—is relative to the price. When bond yields are lower, mortgage rates are lower, too.
However, the New York Times reported that this inverse relationship between stocks and bonds has not held as firm as it has historically, probably in part because interest rates were already so low. Rates are down to around 3.7 percent, and it’s an open question how low mortgage lenders are willing to go, regardless of whether the Federal Reserve cuts its target rate again.
Where the housing market currently stands
The housing market is, in a word, tight. Consider Seattle, where home prices have risen dramatically as it has become one of the country’s leading tech hubs. And while the nation as a whole is suffering from housing shortages, Seattle’s available homes for sale dropped a dramatic 27.6 percent year-over-year in January.
The housing market in other cities isn’t much better off: supply is at near record lows nationwide, and demand is near an all-time high. This combination means home prices are also near all-time highs in most cities as many potential buyers are bidding on a limited supply of homes for sale.
At the end of 2019, the number of houses for sale dropped even lower, particularly on the West Coast. Compared to a year ago, some cities saw double-digit percentage decreases in available homes for sale, although that is partly a function of there having been a supply spike in the second half of 2019, so the decrease looks more stark than it otherwise would.
But the supply spike was short lived. “It’s actually back down near record lows in terms of the level of inventory for many markets and the country as a whole,” says Jeff Tucker, an economist with Zillow.
On the demand side, key indicators suggest there will be a lot of buyers in the market. Low unemployment, solid wage growth, and low mortgage rates are all signals of high demand. Todd Teta of ATTOM Data Solutions, a real estate data provider, says they’ve seen unusually high web traffic to real estate portals like Zillow and Redfin.
“We look at the portals, and traffic was way up relative to seasonality than what you saw in January of 2019,” he says. “All those indicators are looking pretty strong.”
It’s hard to forget the recent history, but while the 2008 financial crisis saw both the housing and stock markets drop in tandem, this was an aberration in so many ways; the housing market crash was ultimately the cause of the stock market crash. Typically the housing market isn’t tied to swings in the stock market, because people don’t buy houses purely as an investment. Housing is a basic need, and the decision to buy one is usually prompted by entering a new stage of life.
A newly married couple is moving in together and is buying a house. A couple is having a kid and needs more space to accommodate the baby so they buy bigger house. Empty nesters have more house than they need after their kids go to college, so they downgrade to a smaller house.
A stock market correction doesn’t change these circumstances for people. Even in full-blown recessions, the housing market is incredibly durable. In some previous recessions home prices have actually gone up.
Another thing to consider is that as the stock market drops, investors look for safer places to park their wealth, hence the bond market going up. The stock market drop can have the same effect on the housing market. Roofstock, a platform investors use to buy and sell single-family rental properties, has seen huge spikes in web traffic since the outbreak of the virus, as global investors look for less volatile investment options.
Are homebuilder supply lines being disrupted by coronavirus?
The short answer is yes. Nearly a third of home building material inputs come from China, according to the National Association of Home Builders, not to mention more finished products like bathtubs, sinks, appliances, and more.
This could delay home construction at a time when it has finally picked back up. Since the financial crisis, home building has struggled to keep pace with demand because of the cost of construction, lack of available land, and a construction labor shortage.
However, home builder confidence has skyrocketed in recent months, according to the NAHB. This signals that builders are more inclined to start construction on homes. To wit, new home sales—largely dependent on how many homes are built—have spiked dramatically in recent months, as have construction starts.
But if supply lines are disrupted, it could dampen the pace of home building and contribute to inventory shortages.
“Low interest rates help support demand, and consumer confidence readings in the coming months will be key, but the virus does heighten some of the longer-term challenges on the supply side in terms of housing supply,” says Robert Dietz, an economist with NAHB.
So how should I approach things heading into the spring homebuying season?
The conditions were set for the spring being an incredibly competitive housing market. Inventory is low, demand was high, and mortgage rates are low. If you already own a home, you might consider refinancing while rates are this low; other homeowners are already jumping at the chance.
However, it’s worth taking recent housing market history into consideration. Two years ago, similar conditions existed in the market and one realtor told Curbed that we were entering “the most competitive housing market in recorded history.”
That market didn’t materialize. Instead, home prices hit an affordability ceiling that kept many buyers out of the market. Eager sellers who listed their homes in hopes of taking advantage of the favorable conditions saw their homes linger on the market, leading to an inventory pile up not seen since the 2008 housing crash, particularly on the West Coast.
Home prices are still very high. If the same conditions existed and home prices were a little undervalued, it would likely create rapid home-price appreciation. But with prices already potentially maxed out, it remains to be seen whether current market conditions cause prices to break even higher or hit a ceiling.
The wild card in the housing market is coronavirus. If its impact is prolonged and induces even a minor recession, it could put a damper on demand—which would actually be welcome for buyers in particularly competitive markets. Still, don’t expect home prices to drop. It would likely just slow down the pace at which they are rising.