What are the Coronavirus Impacts on California's Housing Market?

In the global economy and in domestic financial markets, the rapid growth of COVID-19 ('Coronavirus') cases continues to produce volatility. However, C.A.R. is not revising its current 2020 housing market outlook, but will continue to track the market for negative macroeconomic impacts on the demand for housing as well as the supply chain impacts that could adversely affect the cost of new home construction in the coming months and quarters. C.A.R. has produced a list of the Top 10 possible impacts that over the near term will raise concerns from buyers and sellers.

1. Forecasts Have Been Downgraded, But Few Economists are Calling for Recession Yet: The International Monetary Fund (IMF) cut its global economic growth forecast by 0.1% last week, but still calls for expansion in 2020, albeit at a slower pace. For the domestic economy, similar orders of magnitude have been predicted, with groups such as Wells Fargo and others predicting GDP to rise by 10-20 basis points slower than their predicted pre-Coronavirus. It is expected that growth will be slower, but it is still expected that the economy will rise.

2. Mortgage Rates Will Likely Remain Low, Or Even Fall Further As A Result of Coronavirus: An emergency 50 basis point cut to their target interest rates has been issued by the Federal Reserve and guidance indicates that the Fed could be open to further declines in order to offset the negative impacts on financial markets. This should help to lower borrowing rates and make housing more affordable over the near term, helping to counter some of the negative impacts of increasing uncertainty on housing demand.

3. Domestic Buyers May Be Discouraged By Rising Uncertainty and Recession Risk, But Is It Still a Good Time to Buy?: Mortgage rates dropped to an all-time low level of just 3.13 percent this week. At the beginning of the year, that is down from 3.80 percent and represents significant cost savings over the life of a 30-year loan. The economic uncertainty that is driving rates lower provides an opportunity for buyers who can afford their monthly payments to capitalize on significantly reduced borrowing costs that they will enjoy for years to come. There are short-run threats to the economy, but they are arguably offset by long-run benefits at the individual level from lower prices.

4. Financial Market Volatility Could Reduce Demand For Luxury Homes, But Also Create Potential Opportunities for Luxury Home Buyers: Household wealth has also been affected by the recent turmoil in financial markets. In California, this could decrease demand for luxury homes in particular. However, there could be opportunities for price discounts for buyers who choose to remain in the high-end property market with fewer luxury buyers. Real estate can also serve as a hedge against the stock markets' potentially larger declines.

5. Demand From Foreign Home Buyers Could Be Curtailed Over the Near Term: In China, in particular, reduced economic growth could stifle demand for California real estate this year. However, last year, international buyers accounted for just 3.9 percent of California's home sales, so the effects would be tempered across the state compared to 6 years earlier, when 8.0 percent of the market was represented by foreign buyers. In addition, because domestic buyers typically finance their homes in much larger proportions to their foreign counterparts, low rates could stimulate more domestic demand that would help to offset the impact to foreign buyer demand.

6. Foreign Home Sellers May Face Closing Delays: Since the Embassy and several consulates in China are closed or may have restricted hours, and elsewhere, it may be difficult to provide the estate with a properly notarized deed that escrow will recognize and title will guarantee. Advise sellers to make efforts early in the transaction to obtain the deed. If sellers are presently in the U.S., before returning to their foreign home country, make efforts to comply. Foreign sellers will want to suggest a contingency that allows a seller to cancel if they are unable to acquire a notarized act if the contract has not been approved.

7. New Home Construction in California Could Slow Further, Exacerbating Already-Tight Supply: Many of California's construction industry inputs are sourced from Asian nations, including China. As these supply chains are disrupted by the Coronavirus, the cost of these materials will increase or become restricted over the short term, which will increase construction costs and potentially reduce the speed of new residential development below its already-lackluster speed in 2020.

8. Low Rates and Fewer New Homes Constructed Should Place Upward Pressure on Home Prices: Improved affordability arising from lower rates, combined with fewer new homes being built as the supply chain of construction is affected, could lead to more upward pressure on California's home prices. Unsold inventory is already at low levels, and reduced construction activity means that, particularly if buyers respond to lower prices, it is likely to continue.

9. Offsetting Effects Leave C.A.R.’s Housing Market Outlook Unchanged, For Now: The situation remains fluid and, depending on the magnitude and length of the outbreak, circumstances may deteriorate beyond what is currently envisaged, but if current economic projections of moderate declines in GDP growth are realized, the effects of lower rates could help to offset the effects of a slower economy and increased economic uncertainty to ensure that California still achieves a moderate level of growth.

10. Eventual Rebound Will Take Longer Than It Did With SARS in 2000: At the turn of the century, within 6 months of the epidemic coming under control, the detrimental effects of the SARS virus started to fade. However, SARS did not have a major effect on either consumer spending or the domestic financial markets, unlike Coronavirus. With Coronavirus, the scale of the infected population and the death toll are both much greater, indicating that the potential recovery would take place over a longer period of time.