The coronavirus (COVID-19) pandemic has turned the world upside down. The stock market has crashed. Businesses relying on communal activities are empty for an indeterminate amount of time. The real estate industry will be hit hard in the short term, which will change things in the long term.
1. Interest rates on mortgages are rising.
Even though the Fed had announced that it was cutting its benchmark interest rate to a range of 0.25% to 0%, mortgage rates typically don’t track the Fed’s movements directly. Instead, they roughly follow the direction of longer-term bond yields, including the 10-year Treasury note. Mortgage rates have been surging upwards since January. Increased demand in refinances is causing the surge.
Higher rates will soften demand as the cost to buy a new home will rise. The good news is, economists have said lenders will likely lower interest rates of mortgages once they’ve worked through their backlog of applications. So, in the short term, expect volatility and higher than usual interest rates.
2. Many buyers can’t visit homes right now.
We’re based in California and right now, the governor has ordered residents to shelter at home. Realtor Aaron Kirman recently told CNBC that showing homes is completely off the table – while comfortably sitting in his luxe LA home. While some buyers buy a property sight unseen, the vast majority want to actually walk through a house before spending hundreds of thousands of dollars – or more – on a home.
Clearly, this will be a problem as more communities in the US shelter at home. Without access to homes, buyers won’t make purchases and sellers will be left waiting until buyers are out visiting open houses again.
3. Losses in the stock market have reduced investors’ buying power.
In short order, COVID-19 wiped out the gains the stock market has seen during the Trump presidency. The Dow Jones Industrial Average has dropped to its lowest levels since December 2016. We are clearly entering a recession.
The wealthy invest in many things, including stocks. If you didn’t time the market and sell stocks a month ago, you could have sustained losses of 30% to 40% to their portfolio. While the stock market may rally back, in the short term, the buying power of many potential home buyers has been dramatically reduced.
4. Unemployment numbers will spike as a result of COVID-19.
Unemployment claims in the US surged 30% this week, as thousands of people lost their jobs. In the restaurant industry, as many as 7 million jobs could be cut in the next three months, according to estimates by the National Restaurant Association. If you don’t have a job, you won’t be looking to buy a house.
Keep an eye on the unemployment numbers released on Thursday. Many expect jobless claims to soar.
5. The pandemic may last longer than we think.
Not knowing how long this pandemic will last is creating a lot of anxiety. If we had a better sense of when things will get back to normal, we can prepare. However, things remain very open-ended at this time.
The New York Times just published a troubling story about the 100-page US government federal plan that warned policymakers last week that a pandemic “will last 18 months or longer” and could include “multiple waves”.
Uncertainly rocks any market whether it’s the stock market or real estate market. If you have the option to hold off on buying or selling a home now, it may be best to wait and see how the pandemic plays out in the coming months.