The ink was barely dry on Wall Street’s 2020 outlooks when the first case surfaced in China. A quick tally shows the coronavirus has wiped $1.5 trillion off the value of world stock markets since Jan. 20, when a slide in Hong Kong shares kicked off concerns among traders. What does this mean for real estate? How will mortgage rates react? Should you be concerned?
Why the sudden drop in the Market?
If we use the last major virus, Sars, which occurred in 2002/3 as a roadmap, markets lost around 10% of their value initially. The current virus introduced substantial uncertainty into the global economy. Assets today are priced very high with the assumption that global growth will continue. A virus like the Coronavirus has thrown all these predictions out the window. Traders are trying to figure out how deep the impact will be and how serious of an outbreak this could grow into. Uncertainty creates nervousness in the market with economy trying to price in the downside risk. The problem is at this point, nobody knows the true impact. It could be mild where securities jump back up quickly or it could set off a global panic led by China’s consumers as they pull back on purchases.
What does this mean for real estate?
Currently in the United States, I think the impact on real estate is pretty minor. Real estate is viewed as a relatively safe asset so I don’t see any major sell off in real estate as a result of the Coronavirus based on what we know today. I’ll emphasis the words, what we know today, as there is a huge amount of uncertainty.
The biggest risk is consumer confidence. If the Coronavirus becomes a major pandemic, stock markets will decline both in the United States and throughout the world. When consumers look at the stock market going down, they inevitably will feel nervous and pull back on major purchases like homes. We are still too early in the game to see a large hit to consumer confidence, but that is a very real risk depending on the severity of the virus and the global stock market reaction.
How will mortgage rates react?
As uncertainty builds, flights to safer assets like treasuries increase. Recall that 30 year mortgage rates trade in close tandem to the 10-year treasury so as people buy treasuries, the price increases, driving the yield down. In the case of the Coronavirus, yields have decreased about 30 basis points (.3%). Mortgage rates have also decrease around .3% due to this virus. From December rates have dropped from about 3.75% to around 3.5%. This essentially makes mortgages less expensive and increases consumer buying power. I think the sudden drop in rates will reverse quickly as the virus is contained and the flight to quality subsides.
Summary
We are somewhere near a peak in the economy so any missteps have serious consequences. The Coronavirus is a stark reminder of the precariousness of the current market. Will this virus possibly tip the economy one way or the other? Unfortunately, nobody knows for sure until authorities get a better handle on the complexity of the virus and prospective cures. Until then it is definitely important to keep this on your radar as consumer confidence, mortgage rates, and real estate could have large impacts.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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