Coronavirus Epidemic: Cause for Concern in Real Estate?
By Liz Dominguez
A coronavirus named COVID-19, a flu-like virus, is sweeping the globe, already infecting over 90,000 people since it was first identified in late 2019, after originating from the Chinese city of Wuhan. While there is still uncertainty revolving around how quickly the virus spreads, what the true mortality rate is and who is most at risk, experts agree that everyone should take normal precautions to stay healthy.
The health impact is not the only concern, however. How could COVID-19 impact residential real estate? As the virus spreads to the U.S., with 106 cases confirmed [at press time], according to the Wall Street Journal, concerns mount.
“There are many potential scenarios,” says Dan Forsman, president and CEO of Berkshire Hathaway HomeServices Georgia Properties. “Right now, we see fear and panic impacting the stock market. Our 24-hour, always-on news is fueling it with sensationalized stories. This is likely to start impacting real estate sales as we move toward the spring market. Understanding and communicating the real facts will be critically important in the short term. We and other real estate businesses must have a plan to react to the different scenarios that may come our way and help our associates take advantage of the opportunities.”
Here’s an in-depth look:
Changes in the stock market are often indicators of future fluctuations in several industries, real estate included. Following the worst week for the Dow Jones Industrial Average since 2008, the market index recorded its largest one-day percentage gain in almost 11 years on Monday, according to MarketWatch.
“The markets right now are in flux, as shown by everything happening with the stock markets,” says Tipper Williams, operating principal of Keller Williams Virginia Realty Alliance Group. Working in both the D.C. area and in Richmond, Va., she has not yet seen a direct impact on her markets.
News from the Federal Reserve, which made a sudden decision to cut interest rates by half a point on Tuesday to a range of 1 percent to 1.25 percent, helped stocks rebound—it was the largest drop since the financial crisis in hopes to offset the economic uncertainty caused by the coronavirus. Despite the cut, however, markets remain volatile.
“The coronavirus poses evolving risks to economic activity,” the Fed said in a statement. “In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.”
“The coronavirus has quickly upended global economic expansion and introduced the significant uncertainty of a possible recession. Today’s interest rate cut is therefore an appropriate response to changing events,” said Lawrence Yun, chief economist and senior vice president of Research for the National Association of REALTORS®, in a statement.
“The real estate sector will hold up very well because of the rate cut,” said Yun in the statement.
While not a direct correlation, changes to the federal fund rate do often influence long-term mortgage interest rates, as they move with long-term Treasury yields. As a result, experts expect to see lower mortgage rates—the 30-year fixed rate is currently hovering around 3.50 percent.
“On the domestic front, the super low interest rates will boost housing demand,” Yun tells RISMedia. “There is likely to be some disruptions to home building supply from the global supply chain production. So one inevitable is higher home prices.”
In addition to rising home prices, experts say there could be increased interest in the refinance sector, as well as increased activity from buyers hoping to take advantage of lower mortgage rates.
Several brokerages are monitoring the situation closely. Jason Abrams, vice president of Industry at Keller Williams, is keeping a watchful eye on rates. Right now, he says, lower mortgage rates are a positive for the industry.
“We currently have historically low interest rates and low inventory in many markets. And, it’s all part of the perfect equation for consumers to work with real estate agents on how to navigate the market in changing times and get the best deal,” says Abrams. “This moment is an opportunity for agents to provide value and when the top agents will shine for their clients.”
There’s a limit, however. Joel Kan, associate vice president of Economic and Industry Forecasting for the Mortgage Bankers Association (MBA), says the market could take a turn should the virus keep spreading, and consumer confidence take a hit.
“The U.S. economy, backed by the healthy labor market, enters this period in a strong position. However, last week’s financial market volatility and fears of a widespread coronavirus outbreak are clearly on the minds of policy officials. Long-term, further spread of the virus would likely dampen consumer confidence and spending, and ultimately slow economic growth,” said Kan in a statement. “The 10-year Treasury has fallen to an all-time low over the past week, bringing mortgage rates down with it. If Treasury rates decline further, it is likely that mortgage rates will follow, giving more homeowners the incentive to refinance. For prospective buyers, low rates boost purchasing power, although some may also pause their home search given the uncertainty.”
Investor and Foreign Buyer Interest
Experts say any negative impact on consumer confidence will be short-lived in relation to long-term investor interest.
“For long-term investors, this jolt is a bump in the road that will eventually only be a memory,” said Mark Hamrick, senior economic analyst for Bankrate, in a statement. “It will take some time to arrive at that point. As with the outbreak, we cannot be confident of the depth or duration of the market’s decline or the economic impacts in the short-term. But also similar to the spread of the virus, we know that it will have a conclusion.”
Valerie Post, partner at Engel & Völkers Boston, who works with a significant number of international clients (many coming from Asia), has seen a marked change regarding foreign buyers, but it has largely been positive.
“I was in China at the beginning of January and flew back into the States on Jan. 14. Information about the coronavirus was just starting to circulate and it was actually a boost to our business in the Boston area for the second half of January as our international buyers considered us a safe haven for a place to invest their money,” said Post in an interview with RISMedia. “As the virus continued to spread overseas, our business continued to get better with international buyers. Now that the global supply chain has started to be impacted, it is possible that we may see a slowing of the real estate market with reduced cash flowing from those buyers.”
The presence of Chinese foreign buyers in U.S. markets has already dwindled, says Forsman, but the spread of COVID-19 could have even greater repercussions for foreign investing.
“Certainly, this would drive those buyers even lower,” says Forsman. “We also have a significant buyer segment from India and other countries such as South Korea. Slowing of these international buyer segments would have a greater impact in our market.”
Yun agrees, stating disruptions in travel will significantly impact this segment of the market.
“There will be travel disruptions and hence a decline in viewing and sale of U.S. properties to the Chinese,” says Yun. “The longer the virus spreads without vaccine, the greater the decline.”
According to the Institute of Real Estate Management (IREM), concern over the coronavirus has also reached the property management space. The organization released a statement that anyone with knowledge of a tenant or resident with a confirmed case of COVID-19, should contact the World Health Organization (WHO), the Centers for Disease Control and Prevention (CDC) or their local health department.
The organization also recommends that property managers do the following:
- Create a continuity plan that is reviewed and understood by all employees.
- Review leases to ensure they addressed any potential business disruptions in the case of a pandemic.
- Enforce hygiene protocols such as providing easy access to hand sanitizers, ensuring adequate air circulation and encouraging sick leave.
- Provide information to residents and tenants about how to prevent the spread of infection.
Residential Real Estate
What about from a more street-level perspective? Forsman says the fear of illness could keep consumers from willingly participating in activities that require meeting in person.
“Open houses, door knocking and any form of in-person prospecting could become far less popular,” says Forsman.
And this could have a secondary effect, giving disruptive business models that rely on technology the opportunity to make a dash for business.
“iBuyers could become more popular if sellers did not want potential buyers coming to their home for showings,” says Forsman, adding that resale for those properties could get tougher, however, which would negatively impact iBuyers.
To combat this, Forsman says brokerages must arm themselves with their own tech solutions that make it simple to transact without relying on in-person interactions.
“Real estate brokerages (like our company) are actually well-equipped to operate virtually. We can collaborate effectively, and process offers, contracts and money. We can certainly close contracts electronically, as well,” says Forsman. “The biggest challenges come from showings, inspections and other activities that tend to happen on location and in person.”
Williams expects her agents to express concern down the road if the virus spreads to her market, particularly from those in the midst of a transaction.
“We do have some expectations that agents will be asking questions, particularly in areas where the population has been impacted by the coronavirus,” says Williams. “For example, they may ask how to manage transactions for a property they are about to close on if the seller or buyer gets sick. Similarly, homeowners may be leery about putting their homes on the market in these areas and letting people in for showings.”
Overall, however, Williams says the most important thing is that people not panic.
“We should just be cautious and do all we can to stay healthy by taking precautionary steps,” says Williams.
“The seasonal flu impacts far more people so far and many expect the coronavirus can be slowed in places like the United States with better health systems and more resources,” says Forsman. “The most likely scenario is that this coronavirus will peak and then slow. This could be a great time to buy real estate while it is on sale.”