COVID 19 vs Real Estate 20 The tangible vs the invisible

Its been a challenging time for a lot of people out there due to COVID 19, and amongst other industries, real estate has also been affected. It has left buyers, sellers, realtors, and people connected with the industry wondering about the full impact and the subsequent fall out on the housing market due to the drop in showings and open houses during SIP and the perception of buyers and seller alike.

Speculation is rife, especially in the bay area, which is considered the epicenter of the real estate bubble and how much COVID 19 will affect housing prices. It’s not all bad news even though COVID has crippled various service-related industries with the stock market going down and unemployment seeing higher than ever numbers. However, I do keep getting asked the same questions by buyers and sellers alike that I would like to address and share in this article:

1) What is going to happen to the real estate market and how does it compare to the last downturn?

No one can predict what will happen to real estate prices, nor is it advisable to try to time the market by any means. From articles that I have read and looked at statistical data (some of which I have shared in earlier posts), prices don’t seem to be going anywhere south. In fact, in some of the better neighborhoods, prices have gone up with some areas still commanding multiple offers. The demand may have gone down but it is small compared to the listing demand of people wanting to avoid selling their home during the pandemic. This has resulted in less inventory than anticipated during the spring buying season, and due to the lack of supply vs the demand for housing, the price of real estate has not gone down. The one good thing for buyers is that they don’t have to compete for as much nor do they have to pay 150k-200k over the asking price as had become the norm. You can see the chart above only for Santa Clara county that had 1003 homes for sale a few weeks ago vs 4459 homes for sale 10 years ago. We are over 75% off from that time frame. Here are a couple of articles worth reading:

https://www.keepingcurrentmatters.com/article/how-will-the-next-recession-affect-the-housing-market/

https://www.keepingcurrentmatters.com/article/what-you-need-to-know-about-inventory-shortage/

2)Will the high unemployment result in a spike of foreclosures?

There are millions of unemployed in the US with California having one of the highest unemployment rates. Most that have lost their jobs are in the service sector and companies that are banking on those sectors. Several are in the low-income bracket. However, for the bay area, most people that are buying homes are earning 150K-300k mainly in the technology industry. As long as their employment is intact and transferable, there does not seem to be any pressure on their housing payments. However, the contract workers employed by these giants could face some degree of layoffs.

https://www.yahoo.com/finance/news/fed-officials-warn-of-long-road-ahead-for-us-economic-recovery-200113101.html

3)What will happen to the rental market?

Rents are expected to come down; more so for the commercial real estate market compared to residential. This is purely based on the new norm of working from home and companies requiring lesser leasing space along with the aspect of respecting social distancing. Also, executives working in major cities like San Francisco where the rents are very high, there will be a flight of tenants moving to bigger open spaces to avoid density. Demand for leasing office space will drop as a result of which landlords will be forced to reduce rents and provide better terms to lure companies. Based on location, one can expect to see a reduction in residential rents.

https://sanjosespotlight.com/bay-area-rental-market-rates-expected-to-drop-due-to-covid-19/

4)How will the trade war with China combined with COVID 19 affect the supply chain/pricing for new building and construction projects?

This can be challenging depending upon the outcome of the trade war and the impact of COVID on supply chains globally. We will need to find other sources of manufacturing and supply chain to rely on, including domestic manufacturing. No doubt, we will not be able to meet labor rates as those of China but the government must be able to offer alternatives like tax breaks, etc to manufacturing companies locally to offset some of those costs. With the supply chain disrupted, and procure to source products from other countries being more expensive, the result could see an increase in prices for new construction projects.

5)Will the decline in the stock market affect housing prices in the bay area?

It will not. Real estate is localized and all about the location to the proximity of jobs. The technology sector is still going strong. The bigger companies are more open to employees working from home. The demand has come down but is still outstripping supply not affecting prices. The stock market on the other hand is rife with speculators and can go down further. Every investment is a risk and nothing can be guaranteed, but when the stock market went from 29,000 points to 18,000 points (a 40 % drop) in a few weeks, the real estate market stood still and watched itself stabilizing. Real estate will not drop nor increase by 40% in a few weeks.

In the short term, housing is winning, and in the long term, historically, housing has always won. Economic projections may be dire, but this time housing just might be the catalyst to get us out of this as it contributes approximately 18% to the GDP. Stay safe.

https://www.nahb.org/News-and-Economics/Housing-Economics/Housings-Economic-Impact/Housings-Contribution-to-Gross-Domestic-Product

Nikhil Dhawan

408 478 5396

ndhawan@intero.com

Posted on June 8, 2020 at 5:35 pm
Nikhil Dhawan | Category: Uncategorized

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