By John M. Lee
I am writing this article out of my own home as I am obeying the shelter-in-place order issued on March 17 to slow the spread of the coronavirus. Many thoughts cross my mind during this unprecedented time, such as hoping that all my loved ones, friends and people that I know do not contract this virus. Another thought is that if I have to be quarantined, I am happy that it is in my home.
Buyers and sellers have been asking if the real estate market is going to drop after we get out of this mess. The answer is: it will. It is not a question of if, but when, and how much damage this crisis will do to our economy.
There seem to be two thoughts on this. The positive one is that we had a good first two months in 2020, and this is just a pause in the market. The interest rate remains at historic lows and – with the federal reserve intervention – it might even go lower after this is over. The people who were buying still want to live here, and they will still be in the market after the virus is gone.
The other position is that this market cycle has lasted 10 years and the rate of appreciation has slowed. This is a nail in the coffin and will accelerate our down cycle. Buyers have lost a significant amount of down payment money in the stock market. Many people are either getting laid off or working reduced hours. The unemployment rate will skyrocket when it is reported next. The market will be slow and prices will drop.
Where this is going to land is anyone’s guess right now. There are truths on both sides of the argument.
What I am seeing in the field is that our real estate market was going pretty well with our normal spring excitement. In regards to the properties that were in escrow when the coronavirus hit, some closed, some buyers came back and asked for seller concessions, and some buyers cancelled the contract. So the real-life reactions to the coronavirus have been all over the place.
Currently, most agents are obeying the shelter-in-place order, meaning that real estate sales is not an essential business, and thus the showing of homes, open houses, broker tours, and other ways of marketing homes where there are people-to-people interaction are cancelled until this order is lifted. And thus we know for certain that the number of closings in March and April will be low.
Having gone through the last three down cycles in real estate, I always saw something unexpected that acted as a catalyst to mark the start of the down cycle or fuel the contraction in the market.
In the 1984-90 expansion, junk bonds fueled the market and our 1989 earthquake acted as the marker that brought the market down. I remember the fourth quarter of 1989 when nobody even wanted to think about buying a home and we went into a tailspin.
The next cycle, from about 1995-2001, was accelerated with all the dot com companies doing well and going IPO. All that came to a stop with the 9/11 attack. Even though the market had slowed, the unexpected and suddenness of that event froze the market and prices came down with it.
The sub-prime bubble – where anyone with a heartbeat could get a loan – ran from 2002 to 2007. Before we knew it, foreclosures started happening. Unexpectedly, some of the major banks and financial institutions – ones in which the public had placed their trust – suddenly were gone. Household names like Washington Mutual, Wachovia, Merrill Lynch, Lehman Brothers and Countrywide were gone and absorbed by other financial institutions because the Feds could not afford to let these corporations fail.
And for the past seven to eight years our high-tech boom that produced instant millionaires through bonuses and IPOs has pushed prices to a point where we have had a housing crisis for years now. The rate of appreciation and momentum had slowed, and now the coronavirus has literally put the market to a halt with the shelter-in-place order that makes it next to impossible to conduct a real estate transaction.
When the market starts up again will depend on how quickly we can mitigate the transmission of this virus. It is too early to tell when the market will go back to normal again.
Some of the factors will be how much financial damage this stoppage of work and commerce will have on buyer’s down payment. The interest rate should remain pretty low and that will help with buying power. Buyer’s psychology of whether if it is safe to buy will come to play in making the purchase decision. How quickly the government can help to rebuild our financial system and help our employment picture will also determine how quickly we can recover.
I will be bringing you better market insights as we go through this coronavirus crisis together. Please remain inside your home as much as you can and remember to be kind to each other. We are in this together. Stay safe!
John M. Lee is a broker at Compass specializing in the Richmond and Sunset districts. For real estate questions, call him at (415) 465-0505 or email email@example.com.
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