I've been watching the Orange County real estate market closely as the coronavirus situation continues to escalate throughout the U.S. While the Coronavirus's longer-term impact on the real estate market is unclear at this time, I can tell you based on my observations, research, and interactions with clients/colleagues alike that the market has changed dramatically over this past week. Both near-term and long-term outlooks remain dynamic and uncertain. With that said, given the number of questions I've received from clients inquiring about the state of our local real estate market here in Orange County, I wanted to take a moment to explain my thoughts on this topic.
For the time being, the American economy is at a Coronavirus-driven stand-still. No one should be surprised that increasingly restrictive measures on people's movement and an imminent surge in unemployment, which is likely to have severe consequences on the broader economy, will also adversely impact the real estate market. However, no one should rush to sell their home in a panic and use the proceeds from the sale to invest in toilet paper.
For now, due to the currently stymied financial situation, the real estate market is dealing with a troubled U.S. economy, and prospective homeowners are putting off purchasing properties. In the backdrop, American homeowners are sitting on a record $18.7 trillion in home equity. Still, homeowners are not rushing the banks to refinance. This could be because rates increased steadily over the past couple of weeks. However, it is most likely because people who either took on too much debt during the financial crisis or saw what happened to others who did are warier about taking on high levels of debt on their homes. The latter is not necessarily a bad thing for the long-term health of the residential real estate market as it demonstrates that homeowners are implementing the lessons they learned from the Great Recession. It also serves as one of many data points to chart the differences between this event-driven downturn caused by the Coronavirus, and the Great Recession that lasted 19 months, from December 2007 until June 2009. Note, according to a recent report published by Goldman Sachs, event-driven downturns recover much faster than a cyclical market downturn.
At this stage in the pandemic, a considerable number of buyers are hitting the pause button. On the listing side of things, the California Association of Realtors just issued a moratorium, effectively stopping all open houses. There is a general decline in buyer/seller confidence related to the direction of the overall economy coupled with unprecedented measures taken to combat the spread of Covid-19, including significant social distancing efforts nationwide. As a result, buyers and sellers of residential real estate are operating with an abundance of caution, with most taking a "wait and see" approach in these uncertain times.
Many American economists are predicting an "absolutely brutal" housing market report next month. Still, the overall outlook does not necessarily mean that we are heading into a doomsday scenario. As Matthew Pointon of Capital Economics wrote, "Increasingly restrictive measures on people's movement, and an imminent surge in unemployment, means we expect total home sales will drop by around 35% in the second quarter compared to the end of 2019. But the dip should prove short-lived. Assuming a strong fiscal and monetary policy response, pent-up demand from the spring buying season will help sales recover by the end of the year."
However, at this moment in time, we don't have broadly disseminated data to look at to analyze the severity of the Coronavirus's impact on the real estate market. February data indicating a rise in single-family housing starts pre-dates the outbreak of the Coronavirus, and the outlook for housing starts will, in my estimation, worsen considerably over the next few months. Any disruption the Coronavirus has on housing market activity won't be evident in the home sales data until late April at the earliest. But other metrics like the number of purchase mortgage applications, and reports of new home buyer traffic from the NAHB due to be released this week will provide the first clue as to where sales are heading.
About 40% of annual sales take place from March through June, according to the National Association of Realtors. Hence, the second quarter is usually a critical period for home sales, as buyers try to move into new homes over the summer before the start of a new school year. According to Capital Economics, U.S. home sales could drop by 35% in the second quarter compared with the fourth quarter of 2019 as the pandemic adds to unemployment and keeps potential home buyers indoors. However, “the pace of sales is likely to recover later in the year,” says Capital Economics' property economist Matthew Pointon. He expects total sales this year of around five million, down from his previous forecast of 6.2 million. He goes on to write that "it will take time for the economy to recover, but assuming the country begins to get back to normal in the second half of the year, pent-up demand and a lack of inventory will encourage builders to restart projects."
Regarding mortgages, the Fed promise to buy at least $200bn of MBS will support liquidity in the market and put some downward pressure on mortgage interest rates. But mortgage rates are also being pushed higher by lender caution and capacity constraints, with enforced home working not helping the latter. We probably won't see the 30-year mortgage rate drop much below 3.3% over the next few weeks, but that is still low by historical standards, and it's certainly low enough to warrant taking on a mortgage to buy a great property when the time is right to strike on the right opportunity.
Over the past week, I've seen a much more significant than the usual number of sellers either taking their properties off the market (changing their listing status from Active to either Hold, Expired, Cancelled, or Withdrawn), or dramatically reducing their asking price. I canvased several key OC submarkets for data including Costa Mesa, Irvine, Newport Beach, Corona del Mar, Newport Coast, Laguna Beach, San Juan Capistrano, San Clemente, Aliso Viejo, Laguna Niguel, Mission Viejo, Ladera Ranch, Huntington Beach, Yorba Linda, Santa Ana, Tustin, and Orange. Based on my research and the data I uncovered, I would categorize approximately 70% of all changes made to listings over this past week as a reactionary result of the uncertainty surrounding the impacts of the Coronavirus. I would classify the remaining 30% of changes as those that occur during normal economic and real estate market conditions.
We all know that precious metals offer industrial use as far as intrinsic value is concerned. Property ownership can also be valuable because homes are scarce and necessary. While the real estate market faltered during the subprime mortgage crisis, and then again briefly in 2017, real estate income properties have always produced revenue and profits. They have offered one of the best risk-adjusted returns of the major asset classes.
From my vantage point, it seems like sellers who can afford to weather the storm are taking their properties off the market, while those who need to sell for one reason, or another are reducing their asking price. The latter brings me to the crux of my assessment, and how I'm viewing the real estate market at this moment in time. Be patient, and be prepared to jump on the right opportunity, because we are heading into what I believe will be a highly profitable, yet, opportunistic time in real estate for those who can afford to take advantage of the opportunities that arise.
I certainly don't have a crystal ball, and there are undoubtedly a lot of moving parts with a cloud of uncertainty looming over just about everything these days. Still, if we can agree that the longer it takes to get the coronavirus under control, the longer it will take for the overall economy to recover from it. Then, we should track developments related to containing the novel virus, and we should prepare ourselves to enter a potentially short-lived, target-rich, and highly opportunistic real estate environment. In short, don't panic. Be patient and ready to strike when the right opportunity presents itself. Buy low and sell high when the economy recovers, which it is bound to do.
