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COVID-19 and the Real Estate Market

By Datta Khalsa, Broker

First of all, I want to say that I and the whole team here at Firmus Financial wishes you well during this difficult time - stay safe, get the support you need, and protect yourself and others.

In the face of what has turned into a global pandemic, our reality has become a surreal experience that could hardly have been envisioned 30 days ago, where new terms like “self-quarantine” and “social distancing” have entered the lexicon, and elbow bumps have become a thing.

All major gatherings and events have ground to a halt, schools are closed down, many employees are working remotely, seniors have been ordered to stay home, and the roads are eerily quiet compared to their usual levels of traffic. It’s as if we woke up in some kind of science fiction thriller somewhere between Outbreak and The Stand.

The Numbers

According to a recent analysis from Goldman Sachs, 50% of Americans (150 million people) will contract the virus. This rate of infection is on a par with the common cold (Rhinovirus), but of course immunocompromised individuals are especially at risk. The peak of infection rates are expected over the next eight weeks, after which we will (hopefully) be on the “other side of the curve” and rates will begin to decline.

Of those who contract the disease, 95% will be limited to early-stage symptoms (similar to a cold) or mid-stage symptoms (similar to the flu) - for these people, the best thing to do is stay home for two weeks and rest.

5% of those who contract the disease (heavily weighted toward the elderly and immunocompromised) will experience critical-stage symptoms.

These figures are in no way meant to diminish the severity of this pandemic (5% of 150 million is 7.5 million people - a potentially huge strain on our healthcare system and other sectors of the economy).

Please absolutely follow the common sense public health protocols of social distancing, hand washing, etc. in order to limit the spread of this disease and save lives.

What Does This Mean for Real Estate?

As an investment fund we are asking, what does this all mean for real estate? This remains to be fully played out, but while the retail, restaurant and office real estate sectors have taken a direct hit, the initial indications are that residential real estate continues to be strong across the country as transactions have increased and property values have continued to rise due to short inventory and historically low interest rates.

While this type of robust activity may surprise some in the face of the recent crash in the financial markets, it is consistent with past economic trends. In all the recessions of the last 40 years (with the exception of ‘08 which was fueled more by the foreclosure crisis) house price appreciation year-over-year shows existing-home sales growth barely declined at all, according to national

researchers at First American.

“The housing market may actually aid the economy in recovering from the next recession - a role it has traditionally played in previous economic recoveries.”

Based on real estate activity in past recessions, First American’s report argues that the next recession is unlikely to prompt a major downturn in housing. “The housing market may actually aid the economy in recovering from the next recession - a role it has traditionally played in previous economic recoveries.”

That said, the financial markets have certainly set back buyers whose assets are tied up in stocks and RSU’s, as these have significantly declined during the course of the past few weeks, and this could impact our high-end housing market in the short term.

Of course there will be economic damage from the virus itself. Analysis indicates China’s economy has been impacted which has affected the global supply chain, global GDP growth rate will take a hit, and we can expect the S&P 500 will see a negative growth rate for 2020 overall.

The greatest damage is driven by market psychology.

With China starting to recover, there is cause to hope that we too will weather the storm over the next 60-90 days and things will get back to normal in time for real estate’s regular peak summer season.

In this unprecedented time, I want to leave you with a final takeaway from the Goldman Sachs analysis - in their view, there is NO systemic risk (something no one is talking about). Governments are intervening to stabilize markets, and the private banking sector is very well capitalized.

This, combined with a generally stable housing market, makes this economic shock feel more like 9/11 than it does like 2008.


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