March 11, 2020

The situation with COVID-19 (“Coronavirus”) continues to evolve and markets are down sharply for a second straight week. The California Association of REALTORS® has processed all of the recent data and will likely revise its forecast lower in the coming weeks. However, based upon our current expectations for the trajectory of the virus, the revisions will be modest unless the outbreak accelerates beyond current expectations. This week, we follow up with the top 10 reasons why we expect the market to be softer as well as the offsetting effects that will mitigate some of the downside risk to our industry.

1. C.A.R. Likely to Revise 2020 Forecast Downward, But Not Dramatically: 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 to offset the effects of a slower economy and increased economic uncertainty such that California would still achieve a modest improvement in both home sales and prices this year.
   
2. Wealth Effects will Impact Top End of the Market: Some shift in the market is expected as households become less wealthy, which will reduce demand for real estate. This could have larger consequences for the top end of the market, where financial market wealth is often used as a source of funds for luxury homes, second homes, and investment properties. This could lead to longer time on market and softness in home prices in the upper price segments.
   
   
3. REALTORS® Are Experiencing Issues on the Ground With Buyers and Sellers: In a recent survey of California REALTORS® (conducted March 6-9), more than half expect the coronavirus to negatively impact their business, with impacts to sales and time on market forming the largest areas of concern. One fourth have had clients go on hold and more than one third have been asked about the impacts on the market by their clients. Nationally, 11% of agents reported lower buyer traffic and 7% saw less seller traffic. REALTORS® also stressed the importance of having factual information to share with clients.
   
   
4. More Forecasts Have Been Downgraded This Week: Last week, we reported on the International Monetary Fund (IMF) and Wells Fargo downgrading their forecasts for economic growth by 10-20 basis points. This week, Goldman Sachs also cut its forecast to less than 1% for the first half of 2020. Although forecasters are growing more pessimistic about the impacts of the virus, it is important to note that most are still calling growth—it will just be a much slower pace of growth than originally anticipated.
   
   
5. Recession Risks Increase if Consumers Lose Confidence: Not only will financial market losses impact household wealth, they have the potential to undermine real economic growth. Since the recession ended in 2010, consumers have been responsible for the vast majority of our economic growth. If consumer confidence retreats and spending dwindles as a result, the economy does not have many other sources of growth to fall back on, which could precipitate a new recession as the factory sector remains in the doldrums after taking a hit during the trade conflict with China.
   
   
6. Economic Data Remains Resilient Thus Far: Consumer confidence remained relatively high in February. Although most of the survey was conducted before the virus intensified, it provides good evidence that the U.S. was on a solid footing economically prior to the outbreak. In addition, the U.S. added 273,000 new jobs, which was the fastest pace of growth in a year and well above expectations. We will have a better idea when March data begins to trickle in, but next week’s retail sales report could give us a better sense of consumers, which represent more than two thirds of the economy.
   
   
7. Turbulent Financial Markets Make Real Estate Relatively More Attractive: Although lost wealth is expected to have negative impacts on higher-priced properties, the fear that financial markets could fall further could improve the prospects for real estate as investors seek safe havens for their assets. Prior to the outbreak, the luxury segment had been gaining steam with back to back increases. We will get February data on both closed and pending sales for California next week, which should illuminate the distributional effects further.
   
   
8. Mortgage Rates Likely to Fall Further: The Federal Reserve issued an emergency 50 basis point cut to their target interest rates last week, and more rate cuts are expected in the coming meetings. However, more than the effect of the Fed’s actions, trends in the 10-year Treasury suggest rates may have more room to fall. Given the relatively riskless nature of government-backed loans and the current spreads between 10-year and 30-year rates, the cost of 30-year fixed rate mortgages could come down an additional 10-20 basis points in the coming weeks.
   
   
9. Situation in China Beginning to Stabilize—Hope for Foreign Demand: The number of new Coronavirus cases has begun to fall in China and although the toll has been devastating, there are rising hopes that they may be getting the outbreak under control at last. This will take time to materialize in the housing market, and as we noted last week, international demand has fallen to cycle-lows in California, but this should help prevent a larger decline in demand from foreign buyers.
   
   
10. Yield Curve Improves in Wake of Fed’s Move: The Federal Reserve’s emergency rate cut has garnered both scorn and praise in recent days. Some argue that the Fed acted too soon and may not have many tools available down the road when the economy needs further stimulus. However, one byproduct of the Fed’s recent move is that the yield curve, a highly watched predicter of recession, improved after the benchmark rate was cut. This means that at least some of the short-run risk was reduced.

The markets continue to move dramatically each day and the number of cases in the U.S. is still expected to rise. As such, the outlook for 2020 has been reduced, but not dramatically so at this point. Next week, we’ll have a better reading on how consumers fared in February alongside fresh readings on the California housing market and California Housing Sentiment. As such, we will provide another update next week more information on how the Coronavirus is impacting the market for you and your clients.