The coronavirus continues to affect local and national markets. The spread of COVID-19 has government entities around the world, as well as global markets, facing uncertainty. The situation is impacting the real estate market in two key ways.
- Quarantines, travel bans, and supply chain disruption may cause a 2020 recession. If this happens, food service, travel, and entertainment are expected to be hit the hardest. To minimize potential impact, the U.S. government is working on a $1 trillion stimulus package, anticipated to include funding for distressed sectors of the U.S. economy, backing for small businesses, and providing direct payments for American citizens.The Bay Area has been put under a shelter-in-place regulation. If you have any questions about how this could impact your buying or selling process or real estate transaction, please contact us. We’re happy to answer any questions you have.
- Travel bans are impacting international buyers. Although travel bans are increasing across many nations, the Chinese travel ban could have the largest effect on the US real estate market. MarketWatch reports that Chinese buyers are typically the largest group of foreign purchasers of U.S. residential real estate, and nearly 40% of those purchases happen in California.
We’ll continue monitoring the impact of COVID-19 and will keep you up to date on how it’s impacting our local market. It’s important to remember that real estate is a much more durable investment than most, even in trying and uncertain times.
The stock market falters. The longest-running bull market in history ended in February 2020 due to uncertainty around COVID-19. Both the Dow Jones Industrial Average (Dow) and the S&P 500 indices peaked in February, on the 12th and 19th respectively. As of March 13, the Dow lost 22% of its value from its peak one month earlier. The S&P 500 followed a similar path and is down 20% from its peak. On March 12, the Dow had its worst trading day since the 1987 crash, triggering the second trading halt in one week.
In the midst of this news, it’s important to recognize that the S&P 500 increased over 330% in the last 11 years. All of that wealth has not been lost over the last month.
Interest rates move to zero, and the Fed begins quantitative easing. While we’re experiencing unprecedented events socially and economically, federal interest rate cuts and quantitative easing has created an opportunity for buyers eager to enter the market.
In response to the Dow falling, investors pulled their money out of the stock market and moved it into safer U.S. Treasury bonds, causing interest rates to drop. On March 3, the Fed cut interest rates by 50 bps. On March 15, the Fed stepped in again, cutting the federal funds rate to zero. In the coming months, the Fed will purchase $1.5 trillion in U.S. Treasury securities as well as several hundred billion in mortgage-backed securities. This process of quantitative easing, which increases the money supply, was last used in the 2008 financial crisis in an effort to encourage lending and investment.
Lower rates will encourage current homeowners to refinance and potential buyers to enter the market to take advantage of the cheap financing opportunities. In this climate, investments in real estate will potentially increase, driving prices higher as investors allocate capital away from stocks.
Looking ahead, we expect an increase in volatility in stocks and bond yields to dip lower and lower as quantitative easing progresses. An investment in real estate may actually be the best allocation at this time.
As always, we remain committed to helping our clients achieve their current or future real estate goals. Our team of experienced professionals would love to discuss all the information we’ve shared. We welcome you to contact us with any questions about the current market or those specific to you.