The Coronavirus is on the verge of becoming a pandemic with far-reaching implications on the global healthcare system, financial markets and U.S. economy, including the real estate sector.
The virus currently affects more than 30 countries and counting worldwide, with the Centers for Disease Control (CDC) contending that the virus might not be containable. Any delay in creating a vaccine will only exacerbate the issue at hand.
Not only is this disease impacting the health and well-being of countless people around the world, it is significantly impacting the global financial markets. With the U.S. stock market and equities market already feeling the pressure from the Coronavirus, what does this mean to U.S. real estate markets?
Recessions and the Real Estate Market
To unravel how the Coronavirus will impact the U.S. housing market, we conducted a historical analysis of the five previous recessions and their impact on housing. With the exception of two recessions, the Great Recession from 2007 to 2009, and the Gulf War recession from 1990 to 1991, no other recessions have impacted the U.S housing market, according to Freddie Mac Home Price Index data from 1975 to 2018.
Sources: Freddie Mac HPI, Investimate Data Science
Why has U.S. real estate remained relatively sheltered from these major global events over the course of history? It’s because real estate is a safe haven for investors during times of global volatility.
To that end, we analyzed how the current global financial crisis could lead to an economic slowdown or recession without a quick vaccine in sight. We grouped the influence of the virus into three areas:
Global Financial Markets Sell-Off
The global financial markets are currently reacting to a fear of the unknown. The markets have entered correction territory, as investors rapidly sell off global and U.S. equities, wiping out a whopping $3.6 trillion in gains during the last week of February 2020.
As the capital markets tank, investors have turned to gold as a safe place to park their cash. Goldman Sachs reported that publicly traded companies in the U.S. will generate zero earnings growth in 2020.
Multiple sources have reported that job losses may have a significant impact on local economies throughout the United States and overall consumer spending is likely to decline as well.
Exports and Trade Come to a Near Halt
Coronavirus fears have disrupted many global companies with supply-chain networks in China, specifically the automotive and white goods industries. Forbes reports that China produces $40 billion in auto parts annually, about half of which enters the United States for consumption. Wells Fargo states that the United States imports 20% of its electronics and computer parts from China. Transportation carriers have lost $350 million since China was all but closed off from the rest of the world.
With the export market shrinking, there will be a significant slowdown in U.S. warehouse activities, resulting in contract and part-time warehouse staff layoffs. The International Energy Agency predicts a decline in global demand for oil by 435,000 barrels year-over-year in the first quarter of 2020 due to China’s moratorium on manufacturing and travel. This decrease in demand will subsequently place downward pressure on oil prices.
In all, it will take about three months for the U.S. consumer goods industry to feel the impact of overseas factory shutdowns due to the virus.
Retail and Hospitality Sectors Brace for the Worst
Schools, universities, major events, and other public spaces may close down or be canceled to reduce virus transmission. Employees may be asked to or volunteer to work from home. Business travel has also begun to shut down completely, which could have grave consequences on the hospitality sector worldwide. Restaurants and other retail establishments may also close down until the spread of the virus is contained.
Virus Takes a Toll on Manufacturing
A significant decrease in the import of white goods such as appliances and building materials will affect the real estate industry as property development, repair and maintenance will slow down. This will have a detrimental effect on property sales and leasing timeframes in both the residential and commercial real estate sectors. Building costs will likely skyrocket due to supply- chain crunch on lower-cost steel products in the construction industry. There could be potential labor shortages due to construction workers becoming sick in the U.S. and abroad.
All of these factors may further limit the supply of available housing, contributing to greater demand for existing, “livable” properties. As supply continues to dwindle, additional costs will be passed on to homebuyers, investors and renters in the form of higher prices and higher rents. However, a softening economy highlighted by job losses may counter this pricing pressure.
Investors Turn to Hard Assets Such as Real Estate
Mortgage rates have all but bottomed to historic lows. During an emergency meeting in early March, the Federal Reserve just cut interest rates even further, which would make buying homes more affordable to a larger number of first-time buyers. If there ever were a time to enter the home buying market as an occupant or investor, that time is now
In recent weeks, there has also been a major sell-off and shift to hard assets like gold, which has increased in price nearly 5% since early February. Similarly, investors have turned their sights to residential real estate. It’s generally a safe bet to invest in hard or real assets during a global crisis. People need places to live during any stage of the economy, and as a result, demand for rental housing will always exist.
Based on a five-year average as of 2019, one million households that form may need a place to live in 2020. There is already a supply shortage of 3.8 million homes in the US market creating a demand that needs to be fulfilled. The Fed has reported that economic fundamentals are strong enough to withstand the threat of the coronavirus.
Job losses and economic uncertainty may force people to continue to rent, which will have a positive impact on real estate investors. Overall, these forces are likely to keep the housing market stable with modest growth in spite of stock market turmoil and an economic slowdown.