Sunday, March 15, 2020

Q1 2020 Real Estate Review - Coronavirus and Real Estate

At first glance, the Coronavirus and Real Estate have very little in common. The coronavirus is an un-precedented global health pandemic with the situation seemingly escalating by the week locally and globally. First and foremost, please keep you and your families safe. In the long run, we as a society will overcome this, however in the short run this will not only disrupt our lives, but the situation will also have a major impact to all parts or our local, domestic and global economies. Of the most concern, is how quickly things have changed literally in the last 2 weeks. The stock market has lost over 20%, throwing our bull market into a bear market. Workplaces have mostly asked employees to work from home, schools have been canceled anywhere from 2 to 4 weeks, mass gatherings have been almost eliminated and we are on the brink of a lock down.

The Market Prior to March 2020

Prior to March of 2020, the real estate market told a different tale. Closing out 2019, the Federal Reserve cut interests rates for the 3rd time. This rate adjustment got Buyers who were in discount mode, out in droves as they fought for seasonally low winter inventory. This momentum carried into the spring of 2020 as Sellers once again had multiple offers and some areas were close to wiping out their losses during the real estate market correction of 2018 to 2019. Inventory continued to be low and bidding wars continued for the months of January and February.

The March Avalanche

In the first week of March, the first indications of the coronavirus began to appear with many cases in Santa Clara County. The stock market dropped on the uncertainty and the federal reserve acted quickly by dropping rates by a half point. By the second week, the World Health Organization declared this as a pandemic and the stock markets continued to fall and more drops could be coming.

Real Estate Going Forward

In the short run, there should be enough momentum from this prior group of Buyers for a short period of time. Many in this last group have already liquidated their assets and have been bidding and ready to buy. However, given the uncertainty, unknown impact, duration and magnitude of this pandemic, Buyers are quickly getting nervous on multiple fronts. With the volatility of the stock market down from 18% to over 20% at this moment, remember that tech stocks are the key sources of Buyer down payments in the Silicon Valley. This sudden drop will affect Buyers especially here in the Valley in a major way. We are seeing drop-offs of Buyers during our offer reviews on our listings due to the current crisis. Much will depend on how much worse the situation becomes.

The first scenario is that the situation trends in a positive direction, then the momentum from earlier in the year would lead us into a recovery. Interest rates are at record lows once again and it is very likely that rates could go down further which would be attractive to homebuyers. The second scenario is if we go into lock down; similar to China, Italy and Spain. No rate cut of any kind will help if we end up requiring staying in our homes. If that scenario arises, then the real estate market will come to a screeching halt as with every other part of our economy.

Buyer/Seller Advice

As a Seller, if the situation improves then we most likely haven’t lost too much momentum from earlier in the year. If we end up trending towards the worst-case scenario, there is possibly a small window to get your home sold, but that window is closing very quickly in the short run.

As a Buyer at this very moment in time you will likely have fewer competitors than the last 4 months. If you do get into contract, just be cautious that there might be disruptions in the real estate supply chain such as with lenders, appraisals, inspectors, title companies, etc. I would prefer to take advantage of the market to buy if things do get worse, however if the entire supply chain cannot perform their jobs, then it would be very difficult to close a transaction. Cash would be the least dependent scenario, where most everything could be done virtually with very little interaction needed. If there is a Seller that must sell, and you could buy the home virtually, it is possible that a deal could be had.

Some argue similar to the dot com bust that people flooded to real estate for safety. That is possible, assuming the transaction could be completed virtually which would be difficult in the short run.

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