FAQs: The Market
Updated on March 17, 2020
How is the coronavirus impacting the real estate market?
Nearly 85 percent of California REALTORS® surveyed between 3/14/20 and 3/16/20 expect the coronavirus to have a negative impact on their business. The biggest areas of concern include open house traffic, where roughly 80 percent expect negative effects. In addition, California REALTORS® expect adverse impacts to sales and the expected time on market it will take to sell a home. In addition, nearly two-thirds expected less supply on the market, and more than half expect to run into problems during the closing process. More than half of REALTORS® surveyed have already experienced buyers holding back on a purchase due to the coronavirus. Less than 45 percent of REALTORS® had experienced a seller holding back due to the coronavirus, however more than 10 percent of respondents have experienced a seller removing their home from the market completely due to the outbreak, which will likely depress housing supply even further.
From a macroeconomic standpoint, housing demand is likely to be negatively impacted at the top end of the market due to weaker demand from potential buyers who have recently lost wealth in the stock market. However, low rates will likely attract buyers who rely heavily on debt financing to purchase their home. On net, C.A.R. expects that economic uncertainty, a lack of available inventory, and slowing demand to result in fewer home sales in California this year. C.A.R. expects lower home sales this year than the 393,500 annualized rate it initially forecasted last fall.
How will the coronavirus impact home prices?
C.A.R. is still forecasting a modest increase in the median home price for 2020, but the current outlook for home prices is difficult to assess in this rapidly changing environment.
On one hand, lower mortgage rates will make homebuying more attractive — particularly for first-time homebuyers and for lower-priced homes generally, as those home typically rely on debt financing in much larger proportions that investment properties, second homes and luxury properties.
At the same time, there have been significant negative wealth effects in the wake of market fluctuations. This will reduce demand from homebuyers who were relying on financial market wealth as a source of funds for luxury homes, second homes and investment properties. There might also be counter-vailing effects as some investors seek refuge from turbulent financial markets in real estate.
The net effect of these various forces remains to be seen. Currently, C.A.R. expects negative economic growth during the second quarter of 2020 (and possibly the first), and C.A.R. has modeled scenarios where the negative effects on consumer confidence outweigh the positive effects of lower interest rates such that home prices shrink back from their current highs. Such a scenario is contingent upon the coronavirus deteriorating beyond what is currently envisioned with the infection progressing into the summer with peak cases not being reached until the third quarter.
Will we have a recession?
Virtually every major forecasting group has downgraded their forecasts in recent weeks, including the Federal Reserve, which recently issued another emergency federal funds rate cut. The UCLA Anderson Forecast recently announced that the U.S. economy is already in the midst of a recession, and a recent analysis by Wells Fargo Securities suggests almost 75 percent chance of recession in the next six months based upon plausible assumptions for the Leading Economic Index and financial markets.
C.A.R. itself is projecting a modest economic recession during the middle of this year. The depth and duration of the recession will depend on the length and severity of new coronavirus infections and the ability for the healthcare infrastructure to keep pace with the infected population.
How long will the slowdown last?
From an economic standpoint, it is important to keep in mind that the current economic slowdown is driven by external forces rather than fundamental imbalances in our economy. That will not insulate the economy from the effects of coronavirus, but it should help to mitigate the downside risks to the economy once the virus gets under control.
The current expectation in our modeling assumes peak infections are reached prior to the end of Q2. If the number of new infections continues to rise into the third quarter and response progresses beyond social distancing to more rigorous self-quarantining, then the negative economic effects will be magnified. Consumer spending has already been curtailed. Prolonged growth in the number of infections could see spending, accounted for roughly 70 percent of our economic growth over the past two years, contract more substantially and push the recession into the final quarter.
What does the Fed’s lowering of the key interest rate mean for mortgage rates?
The Federal Reserve’s emergency rate cuts, totaling 150 basis points thus far, has already impacted short-run treasury yields. Unfortunately, the Federal Reserve does not control longer-term interest rates like 30-year fixed rate mortgages. However, 10-year treasuries, which are more closely correlated with mortgage rates, have dipped below 1 percent (0.73 percent as of 3/16/20).
Based upon historical spreads of roughly 170 basis points, mortgage rates should be in the 2.4 to 2.8 percent range. However, the low treasury rates have yet to translate into a significant decline in mortgage rates excepting a brief period during the first week of March 2020. Demand for mortgage backed securities has been impacted by downgraded forecasts and the capacity of loan originators has been stretched thin by a flood of new refinancing activity. Originators must also be cautious with respect to pricing new loans given the rapidly changing rate environment. These factors have all combined to prevent the full benefit of higher treasury prices from filtering down to mortgage rates. And some lenders have not been immune from taking advantage of the current environment to profit from the elevated spread.
That said, C.A.R. expects spreads to begin to decline after the initial surge in refinancing activity begins to normalize. Elevated economic risk will likely prevent mortgage rates from dipping into the high 2% range as historical rates would suggest, but rates in the 3.2 to 3.5 percent are likely to persist through the peak in new infections in the summer.