The Coronavirus is here, and it has brought confusion and panic with it. Just go to any supermarket or Costco and try to find a package of toilet paper. The shelves are bare as people stock up in preparation for… THE PANDEMIC
As a new father it is definitely concerning. On one hand I don’t want to overreact, but it’s hard to keep telling yourself everything is okay when the stock market is plummeting, theme parks are closing, stores are running out of toilet paper, and entire countries around the globe are on lockdown. It’s no wonder that people are worried.
But What Does This Mean for The Housing Market?
The stock market is reeling, which has a lot of people wondering: Does this mean home prices are coming down too? Believe me, as a real estate agent, that question has been weighing on my mind as well. But not to worry, in this article we’re going to wade through the noise and look at the real ways that COVID-19 could affect home prices.
So let’s dive in.
First, I want to briefly talk about the most immediate and obvious effect the Coronavirus is having on real estate. We will probably see a dip in real estate market activity while the virus is actively spreading. Many buyers and sellers are temporarily putting their plans on hold, simply because they want to avoid other people. Sellers don’t want potentially infected strangers walking through their house, and buyers don’t want to risk exposure by going to look at properties. So If you work in the real estate business, you will probably see a slump in business, but I doubt it will have any effect on home prices.
The ways the Coronavirus will affect the real estate market will be indirect. Meaning, the outbreak will impact the economy and the stock market, which will in turn impact the housing market.
How The Stock Market Plunge Will Affect the Real Estate Market
Will the stock market plunge cause the same thing to happen to home prices? Some experts say yes, others say no. As always, the truth is probably somewhere in the middle. But here are the two basic arguments that have been circulating.
First, some financial gurus claim that as investors sell off their stocks, that money will migrate out of the stock market and into safer investments like real estate, which will drive prices higher. The second argument is that the stock market decline will cause to a slowdown in the overall economy, which will drive real estate prices lower.
The first argument that a stock market decline will lead to higher home prices seems pretty counter-intuitive, right?
Well, the idea isn’t wrong, it just needs a little more perspective sprinkled in. The trillions of dollars lost in the stock market, did not just go somewhere else.
Stock prices are down, and they went down suddenly. This prompted many investors to pull even more money out of the market in an all-out selloff, locking in huge losses. So where did that lost money go? The answer is that the lost money didn’t go anywhere, it just evaporated into the fickle herd psychology that is the stock market. The only way to get that money back is to be in the market now, and wait for it to grow back later when the herd is a little more optimistic.
That being said, even with losses locked in, the selloff does mean that there is some more investor cash available for real estate. The question is, do investors want real estate right now?
This brings us to the other argument, that the stock market plunge may lead to an overall economic slowdown. In other words, whether or not that cash goes into real estate, depends on how investors feel about the economy going forward.
Will There Be a Substantial Economic Slowdown
Although there has been a pretty substantial drop in stock prices, I do believe that the market is vastly oversold at the moment and should recover and return to some amount of normalcy fairly easily. I just don’t believe this crisis will last long enough to substantially hurt investor demand for real estate in the long term.
Why? The reality is that this market turmoil is driven more by fear and panic than anything else. But, consider for a moment, the absolute worst hypothetical doomsday scenario we can imagine. Every man, woman, and child on the planet catches the Coronavirus, there are no medical services, we all get sick for a few weeks, the economy shuts down while we’re all sick, and 2% of the population passes away. What happens next?
I don’t mean to be insensitive, but even in this hypothetical doomsday scenario, in a couple of months when the virus has passed, the world will move on. Stores will re-open, disrupted supply chains will be patched up, and at the end of the year, this will have been a terrible 1st and 2nd quarter for everybody (except companies that sell toilet paper). But we will all be past it and looking toward the future.
I believe that our real-life scenario is going to be much, much more mild than our hypothetical doomsday scenario.
But, make no mistake, the current pandemonium around this virus (whether warranted or not) has made and is continuing to make a real impact on the economy. We may not see the effects just yet, but businesses have closed down, events have been canceled, many people have lost work and income, people are staying home, and supply chains have been disrupted. Even if everything went back to normal tomorrow, there has already been some damage done.
So How Will This Economic Slowdown Affect Real Estate Prices?
Keep in mind, real estate prices are determined by two things, supply and demand. Supply is the number of properties for sale, and demand is the number of willing and able buyers that want those properties.
The fact of the matter is that an economic slowdown of any kind will inevitably affect real estate prices, because slowdowns lead to lower employment and lower wages. This in turn, reduces demand as buyers are unable to pay as much for homes, and increases supply as some homeowners will be unable to afford to stay in their homes. Lower demand and higher supply will of course apply downward pressure on prices. But I just don’t see the impact on the economy being big enough, and therefor it won’t be enough to significantly drive real estate prices down, especially not long term.
The overwhelming force driving prices in the California real estate market is the shortage of available housing. The Coronavirus pandemic, as impressive as it is, isn’t going to solve the housing shortage. Once the virus has passed and we’re all moving on with our lives, there still won’t be enough homes for the people that want to buy them, and prices will snap back more or less where they were when this all started.
One More thing, Did You Catch That Credit Crunch?
You may have seen some passing headlines this past week about the Federal Reserve injecting a whopping $1.5 trillion dollars into the banking system. The reason the Fed did this was to avoid a credit crunch, a scenario in which banks run out of money to lend to borrowers.
I noticed that this didn’t get a whole lot of attention in the news. But, of all the possible ways that the Coronavirus pandemic could impact the housing market, bringing on an actual credit crunch would would be the scariest… By far!
Remember how real estate prices are determined by supply and demand? Remember how the number of willing and able buyers make up the demand for real estate? Well, if banks run out of money to provide mortgages, then most of the buyers in the market would all of the sudden be incapable of buying a house. Without any able buyers, demand for real estate would drop off a cliff, and prices wouldn’t be far behind.
But don’t worry, with the Federal Reserve is committed to preserving liquidity in the credit market, so a credit crunch is extremely unlikely.