Will The Corona Virus Affect The Real Estate Market? The question is not if it will… It’s WHEN. Recently, the Fed dropped the federal fund interest rates to 0.25%… This should be good news! In theory, This will encourage and inspire a new group of individuals to buy a home and have a minimum mortgage payment. Also, current homeowners should be interested in lowering their expenses by refinancing their mortgage creating business for banking.
Okay… how can anything go wrong?! So when will the effects of the corona virus translate from the stock market to the Real Estate market? The answer is simple. Job Loss. If the virus continues to spread at a rapid pace… it will take longer to get under control. This crisis and its’ effects could last until September 2020.
During this pandemic, initially in mid-march, everyone was sent home on quarantine orders for two weeks. Many employees are working from home, others are on paid leave. However, how long do you think employers are willing to pay you… WITHOUT THEM BEING PAID? Companies’ loss of business will have the greatest impact throughout this crisis. Because of social distancing, no one is going out. That means business is not being conducted. Items are not being sold. For banks, transactions are not being made. Cars are not being purchased. Once those impacted sales numbers are revealed, companies will face decisions of budget cuts, store closures, and layoffs. Next to taxation, Human resources or costs of labor are usually the biggest expense for a business.
Unemployment is the single most influential component of a recession. The moment that unemployment begins, there will be people who are unable to pay their rent or mortgage. When a tenant can’t pay their rent… a landlord can’t pay their blanket mortgage which causes foreclosures, bankruptcies…and so-on … the cycle begins. Even evictions cost owners money in legal fees. Similarly, impacted business owners from the lock-downs will likely NOT be able to pay their rent. Thus creating a domino effect on the commercial real estate business.
Example, A night club owner may no longer afford to rent a space after a month or two of being closed which causes vacancy. Owners of those locations may not be able to pay their commercial business loans etc. The thing that makes real estate the best investment vehicle is this… Some people may choose to invest in the stock market… others may not, BUT EVERYONE NEEDS A PLACE TO LIVE. Real Estate affects everyone.
Until a company recuperates profit… they won’t hire. Industries that will feel the pressure are restaurants, travel, tourism, hospitality, retail stores (malls), nightlife, entertainment, utilities, mortgage banking, auto sales, realtors, investors etc. The secondary market of those affected will be those who the primary markets does business with. People like delivery truckers for food, insurance writers, Title companies for realtors, Branch managers, contractors. These positions may seem small but they are the building blocks of the community. When unemployed workers can’t pay their bills… it creates a cascading effect.
Once jobs are lost, less qualified buyers are available to buy houses. As a result, there are less sales and properties sit longer on the market for Realtors. In the Real Estate industry… this is known as a buyers-market because the buyers are so few that they have the negotiation power on the price of properties. Mortgage defaults will result in more owners selling their property. Less Demand+ More Supply= Price Decrease. Real Estate Prices will fall dramatically.
If you are an investor, this is an opportunity to be prepared for. If you are a home buyer, you have come at the perfect time.. low rates, lower prices. For renters, rent prices may come down. Markets such as San Francisco, CA are long overdue for a price correction. Property owners should save and be prepared for expenses. Do NOT take on any more fix and flip projects during this time. Everyone should lower their expenses as best as they can by refinancing and consolidation. Expect these effects as soon as May 2020. Here’s How to Prepare!
Want to become a homeowner? Please read! or Looking to invest in Stocks During The Crisis?