The picture above is a bit more relaxing to look at as opposed to the media barrage of the coronavirus and stock market (do you know where I took the pic, hint in CO, email me if you know).
The Coronavirus has caused stock markets around the world to quickly sell off as irrational exuberance quickly reverses to irrational pessimism on the economy. The fed attempted to stop the slide with a 1/2% rate cut which under ordinary circumstances would help, but in these uncertain times the markets continued their decline. How will this recent selloff impact real estate? Will this be a repeat of 2008?
What happened?
Markets around the world are gripped by fear that the first “pandemic” in recent history could be upon us. This has caused a basic shutdown in international travel and in many cases supply chains as China is gripped by not just the coronavirus, but fears of the virus. This fear has spread from China throughout the world and recently to the United States.
Currently the market has no historical reference to price in the downside risk from a prospective pandemic so the best option for many market participants is to sell now and ask questions later. This has led to panic in many cases that the worst is yet to come.
The positive:
As fear grips the market, demand for safe havens has skyrocketed. The number one safe haven is United States Treasuries. As demand increases so has the price of US government bonds which have caused yields to plummet (remember yields work in inverse to price). Furthermore, the federal reserve recently cut rates by ½% of a percent which is putting further pressure on treasury yields.
With a rapid decline in 10 year treasuries, mortgage rates are also falling to fresh lows. With the rapid decline in rates, consumers have considerably greater purchasing power. This is essentially putting a “floor” under real estate prices as prices are becoming relatively cheaper due to the decline in rates.
Consumer confidence: The wild card
How consumers react from the media barrage of negative information will be the wild card. I suspect that over the next month or so we will see a pullback in consumer confidence and ultimately large purchases like houses and cars. How much the consumer pulls back is the million-dollar question. The next question is will the consumer bounce back quickly from the pullback and will this be a v based recovery or more of an elongated U? How these questions are ultimately resolved will determine the pain felt by general economy and ultimately real estate
Will we repeat 2008 with a real estate debacle?
I think it is doubtful that we will have a meltdown to the same magnitude of 2008 for three reasons: inventory, underwriting, and rates. First, in the last 12 years inventory has been constrained, the number of building starts and spec building is considerably lower than before the 2008 meltdown. Without lots of excess inventory in most markets, prices will stay relatively stable. Along with controlled inventory, for the most part, underwriting has been considerably better. The old “stated” loans are a historic relic and most banks have been considerably more conservative on their underwriting. This should help reduce the amount of foreclosures as borrowers are better able to weather the next storm. Finally, low rates will allow consumers more purchasing power and/or the ability to refinance into a lower rate to reduce their monthly payments.
Summary
Just as the markets have gone up irrationally in the last 6 months, they are now swinging the other direction to the downside. Eventually the markets will appropriately price in risk and the markets will stabilize. I don’t see the coronavirus bringing the markets to a 2008 like crisis, but there will be some short-term pain in the economy and real estate. Structurally the economy is doing well and the coronavirus should just be a minor speed bump. Now is the time to sit back and not react one way or the other. Long term the economy will stabilize and real estate looks unlikely to repeat the woes of 2008.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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