Covid, The Housing Market, The Economy, and What’s Going to Happen Next
Over the past 10 weeks, life has changed in ways that were previously inconceivable. As fear grew with headlines showing the Novel Coronavirus pandemic taking hold in many countries including the United States, the booming economy and real estate market of January and early February has been met by tanking stock prices, massive layoffs, “safer at home” orders, and the closing of schools and non-essential businesses. Gatherings of all kinds including sports and entertainment have been shuttered indefinitely. If you dare to interact with another human outside of your household at all, be prepared to get the full leper treatment with masks, gloves, and keeping a safe distance. While real estate is considered an essential business and business is able to occur, the fear and uncertainty of all of this has caused many home buyers to re-evaluate or pause their search and lenders to re-evaluate their lending standards. Things have gotten sur(real), real quick, but we Americans are a resilient bunch and will move forward and the economy and housing market will recover. This is how it will happen.
Although the disease continues to be a serious threat, it is clear that the curve is flattening and governments will reconcile their desire to protect the public with the greater damage that is being caused to society and the economy from the shut-down. LA County hopes to open up with safety protocols by July 4th and schools are working on a plan to bring back students in August. This is necessary and returning to a more normal way of life and managing the risks while allowing people to make their own responsible choices is necessary for government officials to be re-elected. While this is cynical, it is 100% a consideration of decision makers as it is becoming clear the majority of voters will not stand for this level of self-inflicted unemployment and take what they consider to be calculated risks with their health and safety. Flattening the curve and not overwhelming the medical system was always the goal and protecting everyone is impossible. While most businesses will soon be open and sports will resume without fans in the stands, restaurants and air travel will still be operating at such a reduced capacity that it will be almost impossible to be profitable in most cases. This will continue until there is a vaccine. A substantial bailout will be needed, otherwise the vast majority of restaurants that are not predominantly take-out or delivery will go under.
Since the pandemic began, both housing supply and demand have been reduced and equilibrium in the housing market is relatively unchanged, albeit with lower volume. In April, total sales volume in California was down 30%, however median prices were up about half a percent since April 2019. As businesses open and entertainment returns, people will regain a feeling of normalcy and will begin listing and buying homes at a greater pace. There is currently pent-up supply as well as demand, however as this happens, supply will increase more than demand in Southern California. With a 20%+ unemployment rate on the horizon, difficulty of travel likely slowing second home purchases, and tenant-friendly eviction rules scaring landlords and potentially making some leave the rental housing business altogether, demand will not be as strong as it was and supply should increase, leading to somewhat lower prices in some markets and price ranges. There is a finite amount prices can drop before deal seekers swoop in, so values should be fine in the long run. Multiple buyers are already letting me know they are open to opportunities when and if they arise.
In terms of the overall economy, while stock prices have regained over 50% of their losses from the March lows thanks to swift fiscal stimulus and hopes that this recession, while steep, will not be prolonged, main street is not going to bounce back so quickly other than sectors who benefit from the “stay at home” space such as Amazon or biotech plays for vaccine makers. Even still, with high unemployment and depleted savings, people will change their spending habits, reducing corporate profits. It will take a while to recover and many less well-positioned companies will go out of business. Additionally, the massive stimulus that has been pumped into the system will likely lead to higher taxes and inflation as prices increase faster than the purchasing power of the currency.
The forced adaptation to work from home technologies such as Zoom and the further reliance and increased users of e-commerce platforms like InstaCart and Amazon will accelerate stay at home trends. This has implications for both residential and commercial real estate. On the residential side, many buyers could increasingly favor size over location, which would negatively impact condos or smaller homes in expensive cities in favor of larger ones in more suburban areas. Moratoriums on eviction and other tenant-friendly laws will scare away investors on both the residential and commercial side, especially in the more burdensome states. In terms of commercial real estate, the need for expensive office space when people are able to work from home will be reduced and the need for constant business travel will be re-evaluated. The reduction in commuters and travelers will lead to lower oil prices and energy companies will fail. Hotels and rental car companies will see reduced activity. Additionally, if people continue the trend of shopping from home, retail shops will close their doors in favor of warehouses. Retail workers will lose jobs and might start online retail shops. New jobs will be created: waiters will become delivery drivers, tech coaches will be needed for those who need help to adapt. Whether for good or for bad, Covid has accelerated technological changes and with less subtlety than the incoming tide, the economic waves that come with it.