Over the last two weeks, the U.S. equity markets have seen extreme volatility not seen since the Great Recession.
The Coronavirus, which started out as a small outbreak in China, rocked the second-largest economy in the world over the past two months and has started to spread throughout the globe.
Further, the Coronavirus is starting to affect confidence and nerves not just in the United States, but in California, Los Angeles County, and in the South Bay. In fact, California just declared State of Emergency.
Per USA Today’s Curtis Tate last night, he reported that a contract medical screener at LAX tested positive for Coronavirus. That hits right at home here in the South Bay.
Whether justified or not, people are getting nervous that there could be large risks to public health and the economy.
In my purely speculative opinion, I believe that as government agencies begin to distribute more testing kits, we will see a spike in Coronavirus cases throughout the United States and possibly, here in the greater Los Angeles area.
How will this affect various investment markets? How will it affect confidence?
Our hearts go out to patients and families dealing with the virus. Here at Manhattan Pacific, we hope as a local community, and as a nation, that we can work as one to limit the affects and get through this together.
Since this is a real estate blog, below are the risks and rewards, how markets are performing, and what to do in South Bay real estate markets…
Possible Negatives
Potential Sales Drop
Currently, China is the best example we have of how a real estate market will be affected if we experience a serious outbreak here in the United States.
Based on an article in the Wall Street Journal by GE ChuangHong and the Zuma Press, they were estimating that home sales in China likely plunged by 90%. Essentially, the market froze.
Analysts are obviously expecting price declines as a result and a contraction in residential real estate markets throughout mainland China.
If the United States were to experience a similar outbreak like China, then we will likely see demand and inventory drop until the virus is under control.
The Chinese real estate market is just one comparable example. You will want to watch how real estate markets are performing in other affected markets like South Korea and Italy. If their real estate markets feel the same pain, then you could expect to see that similar market action at home if the virus were to get out of hand.
Stock Market Volatility
Much of our nation’s wealth is stored in the public stock markets on large exchanges like the NYSE and Nasdaq.
As of market close today, the S&P 500 is about 10% off its highs made in February. If the Coronavirus spreads, that could fuel a further drop in equity markets.
A vast majority of down payments for home buyers is kept in these markets, not to mention low-interest margin accounts that allow high-net worth buyers borrow on stock accounts to make cash offers on luxury property.
If volatility continues, then confidence and access to down payments and borrowed money will be less available and potentially have a negative effect on demand.
The Fed
This is interesting as the Fed’s move earlier this week is both good and bad news.
The good news is that they are ready to support markets the best they can.
The rest, likely, are negatives:
- Low interest rates don’t stop potential viruses and cure public health.
- An emergency cut of 50 bps before the effect of the virus hits does not speak volumes of the Fed’s confidence in the current economy.
- What is left in the arsenal if things get worse?
You never want to fight the Fed, but we are in the early stages and the 10-Year is telling us that investors are very scared.
If The Fed is this worried, we might want to proceed with caution as well.
Possible Positives
Low Interest Rates
Mortgage interest rates are low. Basically, at all-time lows.
Due to investors piling into safe-haven bonds, mortgage-backed securities get bought up as well and rates get driven down like crazy.
Low rates give buyers more purchasing power. With more purchasing power due to low-cost leverage, assets that are traditionally driven by loans tend to be go higher in value.
Not only can lower rates be a fuel to real estate, but current owners might be able to refinance and buy even more real estate.
C.A.R. Not Changing Forecast
The California Association of Realtors (C.A.R.) normally will spin data to make the market sound great all the time, but over the past couple of years they have recognized slower sales and price deceleration. They have told it like it is and can be pretty reliable.
Yesterday, their experts and economists restated that their market outlook is unchanged, for now.
Here is their statement:
“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 offset the effects of a slower economy and increased economic uncertainty such that California would still achieve modest improvement in both home sales and prices this year.”
C.A.R. Chief Economist, Leslie Appleton-Young and her team have done very well with their forecasts statewide and this should breath some solace into the market.
Confidence is Still Strong
The chairman of Douglas Elliman, with residential operations in Los Angeles and New York City, said that they are not seeing effects from the Coronavirus yet. That is a good sign.
According to CNBC, there is data suggesting that foreign investors and domestic investors are driving huge traffic to real estate websites to buy residential as a safe-haven asset.
Lastly, the Coronavirus is on the minds of local agents and current clients of mine, both sellers and buyers alike. That said, none of them have indicated to me that they will be shelving a listing or not looking to purchase a home due to the outbreak.
That is strong confidence when in the face of a stock market correction and emergency Fed actions.
How Our Local Market is Performing
At the current moment, I am not seeing anything funny nor any negative impacts from Coronavirus.
Inventory still looks to be tight, but is slowly increasing as expected during the ramp-up to spring selling season.
Real estate moves SLOWLY. So, unless the local government moves to keep everyone in their homes, which would freeze demand, the market will move gradually and be less reactive than other markets.
For now, the combination of ultra-low rates and tight inventory will support the market in the very near term.
What Buyers and Sellers Should Do
Before I comment, you need to decide if you are long-term or short-term in the South Bay real estate market.
These are recommendations for long-term players only.
There is nothing wrong with short-term investors, flippers, and speculators, but I will leave that to personal analysis of what each individual is trying to accomplish.
Buyers
I think there is a potential opportunity for buyers in this moment.
If you plan to live in the South Bay longer than seven years – ten years is better – then I think you can take advantage of psychology.
I think this is the right time to low ball any Seller that has been on the market for a few months and is motivated and/or cut their price. If a listing has lingered on the market and gone through price cuts, the Seller is going to be very nervous about market conditions.
There will be some amazing deals made in the next month or two if the Coronavirus proves not to be as drastic of an issue as initially thought.
If the market really deteriorates, then your low-ball price should hopefully protect you on the downside.
Sellers
For now, I think Sellers proceed as usual.
With low interest rates and tight inventory, you still have some wonderful tailwinds as long as buyers continue with the same confidence over the last two weeks.
You must, MUST know the value of your home with great confidence. Why?
Well, what if the market loses demand due to the virus spreading? You do not want to give away your home in what might be a short-term market blip. Understand the true value and stay firm on your price.
If the market gets ugly for a while, then take it off the MLS and wait to re-list in the Spring or Summer. Buyers need homes and the demand will not be lost forever, in fact, it will be pulled forward when confidence is back. You will hopefully see stronger seasonal activity Summer through Fall as the demand just gets pulled forward over the next few quarters.
Conclusion
The markets are wild out there!
If the epidemic gets worse, then look to what has happened and is happening in China, South Korea, and Italy to understand what might be coming.
If it looks like things are blown out of proportion and there is too much negative speculation, then be confident in listing and holding your price. And, if you are a buyer, go out there and make a lot of low-ball offers.
Be careful. Stay healthy. And focus on making sound, rational decisions.