The coronavirus (COVID-19) has become a serious issue.
With over 1,000,000 confirmed cases worldwide as of April 2, 2020, the death toll rising, college campuses dismissing students for the rest of the year, and most of the world going under lockdown. The fear continues to grow and without proof of medication to slow down its spread, the global economy remains in freefall.
This leads to a pertinent question on the minds of many homeowners.
How will the coronavirus affect the value of my home?
Let’s talk about it.
The Economy Will Rebound. But How and When?
The determining factor in whether real estate prices are affected will be whether the economy rebounds faster or slower.
By nature, real estate is a stable investment. Stock prices can tumble, and global economies can sink into recessions, but that doesn’t mean real estate prices will fall with them.
In fact, home values have risen during troubling economic periods in the past.
Of course, home values are susceptible to recessions. But when interest rates are at record lows, consumer confidence remains high, and real estate markets across the country are at record lows for inventory, fostering a competitive market. It’s hard to imagine 2008 levels of economic crisis.
The bottom line, many of you are thinking back to the 2008 Great Recession and feeling anxious. But, back then, the system was fundamentally flawed, and we were in an economic bubble that finally burst.
This time around, we are not in an economic bubble, and the current downturn is being led by an external abnormality (coronavirus), not an internal financial deficiency.
I see two paths of recovery. V-shaped recovery and U-shaped recovery.
How Will Real Estate Be Affected by a V-Shaped Recovery?
A V-shaped recovery is a sharp increase in the global and U.S. market. One where consumer confidence remains strong, allowing for corporations who have lost investments to remain profitable due to consumer purchases. Investors will flock back to the stock market and everything goes back to business as usual.
This recovery is contingent upon a coronavirus vaccine or a slowdown in its infection rate.
Governments around the world need to be able to show that they have the situation under control. Without evidence, a sharp comeback is unlikely.
In a V-shaped recovery, real estate is hardly altered, if at all. The only markets you may see affected are ones where coronavirus is present, or commercial real estate. But you wouldn’t see any overall changes to the U.S. residential market.
In fact, due to a Federal interest cut, you may see more real estate activity, prompted by investors or homeowners looking to refinance.
The coronavirus might make the real estate market even better for buyers who are considering a mortgage. If the Fed continues to lower interest rates to prompt a buyback of stocks, and it works in tangent with control of the virus. Interest rates are unlikely to rise until well after the panic calms to keep markets stable.
I should note that simply because Federal interest rates are cut, it doesn’t mean that mortgage brokers must follow. But, if a group of lenders decides to run with the lower rates, the spirit of competition will naturally bring them all down.
So, in a V-shaped recovery, I wouldn’t expect to see home values change very much.
How Will Real Estate Be Affected by a U-Shaped Recovery?
This scenario could cause a change in home values across the nation.
In a U-shaped recovery, the coronavirus is not being contained and fears escalate even more. Consumer confidence falls, stocks remain in a downturn or stagnate, and governments have a hard time keeping their citizens from panicking.
It’s in this situation where we could see a full-blown economic recession. Mind you, not as worse as the 2008 recession. As I mentioned above, there is no fatal flaw within the economic system that will cause internal destruction.
Recovery will simply be based on the amount of time it takes for the coronavirus to slow down.
In this scenario, you may see a decline in the number of real estate sales taking place, which would cause sellers to reduce prices to incentivize buyers. You might also see a slowdown in new construction because of the large volume of construction material imports from China.
With lower inventory and fewer new construction homes being added to the inventory, residential real estate markets across the nation will feel the effect of the coronavirus, especially if the virus enters their communities.
Will the impact last a long time?
I’d place my wager on the length of time it takes to slow down the virus. Unfortunately, we have no idea how long that will take.
Tests are underway and scientists and medical professionals are working day and night to find a vaccine or cure. But until we have concrete evidence that something might work, there’s no way to place a time on it.
In terms of the definitive drop in value across residential housing, that also is unpredictable.
As you can see in the graph above, the shaded areas indicate a recession. Due to the 2008 crisis being caused by the housing bubble, home values dropped over $20,000 across the U.S.
But if you look at the recession just before 2002, there’s hardly a drop.
I would assume if there is a recession caused by the coronavirus, then housing values will either remain the same or drop within $10,000. I can’t see anything more than that.
(Remember, this graph indicates the entire U.S. real estate market. Your local market may have different fluctuations).
How Has the Coronavirus Affected the World Thus Far?
It’s important to take note of what’s happened since the coronavirus made its way throughout the world.
In the last month:
- The U.S. stock indices lost 35% of their value after peak record highs in February.
- The Fed lowered interest rates by .05%. Now sitting at 1.25% as of writing.
- The 10-Year Treasury bond market dropped below 1% for the first time in its history.
- The U.S. Senate approved $8.3 billion in emergency funding to combat the coronavirus.
- U.S. Congress passed a $2 trillion plan to send every American money to cope with the virus.
- Many nations and U.S. States have gone under lockdown to prevent the spread of COVID-19.
- All colleges and most schools in the U.S. will conduct all classes online for the remainder of the school year.
- There are now over 1,000,000 confirmed coronavirus cases in the world.
- Every U.S. state has a coronavirus case.
- An oil price war has started between Saudi Arabia and Russia.
- Airlines are considering the suspension of all domestic flights.
- The United States has the most cases in the world.
Let me know what you think about the housing market and the coronavirus in the comments below.
As for Berri Properties, we’re reducing our business practices. While North Carolina has deemed real estate an “essential service“, Buncombe County has not. Therefore, our abilities are limited until what seems like mid-April.
Stay safe.
Stay Classy.
