As the virus spreads, the stock market is tanking. Will housing follow?
The rapid spread of the coronavirus has caused chaos to the travel industry, affected the stock market, and has claimed more than 3,000 lives. Conferences, professional sports games, and other widely-attended events are being canceled, people are stockpiling groceries in preparation for the worst, and the stock market is plummeting.
If you’re in the market to buy a home, this uncertainty might have you worried about the housing market. Will it suffer similarly to Wall Street? There are a few ways the virus could affect the housing market.
Coronavirus already pushing mortgage rates lower
The current dip in the stock market is being caused by the possibility that the coronavirus will disrupt global supply lines, damage corporate earnings, and thus make companies less valuable. But it will take some time for us to see what the actual effect of the outbreak is on business.
What matters more for housing is bonds, the price of which affect mortgage rates. When investors start thinking the stock market is too risky, they sell their stocks and buy bonds. The increased demand pushes the price of bonds higher. The higher the price of bonds, the lower the interest payment—called the yield—is relative to the price. When bond yields are lower, mortgage rates are lower, too. And therefore, we’re seeing the drop in mortgage rates.
Rates are down to around 3.5 percent, and the Federal Reserve announced earlier this week that it was cutting its target interest rate by a half percentage point, which typically would cause mortgage rates to fall even further.
However, mortgage rates are already at three-year lows, and it’s unknown how low mortgage lenders are willing to go, regardless of whether the Federal Reserve cuts its target rate.
Where the housing market currently stands
The housing market is tight, supply is at near-record lows nationwide, and demand is near an all-time high. This combination means home prices are also near all-time highs in most cities as many potential buyers are bidding on a limited supply of homes for sale.
It’s hard to forget the 2008 financial crisis where we saw both the housing and stock markets drop in tandem, yet the housing market crash was ultimately the cause of the stock market crash. Typically, the housing market isn’t tied to swings in the stock market, because people don’t buy houses purely as an investment. Housing is a basic need, and the decision to buy one is usually prompted by entering a new stage of life.
A newly married couple is moving in together buying a house. A couple is having a child needs more space, so they buy bigger house. Empty nesters have more house than they need, so they downgrade to a smaller house.
A stock market correction doesn’t change these circumstances for people. Even in full-blown recessions, the housing market is incredibly durable. In some previous recessions, home prices have actually gone up.
Are homebuilder supply lines being disrupted by coronavirus?
The short answer is yes. Nearly a third of home building material inputs come from China (the country being hit hardest by the virus), according to the National Association of Home Builders, not to mention more finished products like bathtubs, sinks, appliances, and more.
This could delay home construction at a time when it has finally picked back up. Since the financial crisis, home building has struggled to keep pace with demand because of the cost of construction material, lack of available land, and a construction labor shortage.
However, home builder confidence has skyrocketed in recent months, according to the National Association of Home Builders. This signals that builders are more inclined to start construction on homes. New home sales—largely dependent on how many homes are built—have spiked dramatically in recent months, as have construction starts.
But if supply lines are disrupted, it could reduce the pace of home building and contribute to inventory shortages.
“Low interest rates help support demand, and consumer confidence readings in the coming months will be key, but the virus does heighten some of the longer-term challenges on the supply side in terms of housing supply,” says Robert Dietz, an economist with NAHB.
How to approach things heading into the spring homebuying season
The conditions are set for the spring being an incredibly competitive housing market. Inventory is low, demand is high, and mortgage rates are low. If you already own a home, you might consider refinancing while rates are this low.
Home prices are still very high, and many prices are already maxed out. It remains to be seen whether current market conditions cause prices to break even higher or hit a ceiling.
The wild card in the housing market is coronavirus. If its impact is prolonged and induces even a minor recession, it could put a damper on demand—which would actually be welcome for buyers in particularly competitive markets. Still, don’t expect home prices to drop. It would likely just slow down the pace at which they are rising.
If you have questions regarding the housing marketing, refinancing your home, or are looking to purchase a home in the San Antonio area, call me at (210) 889-1112.
Source: Curbed.com, Jeff Andrews