The Coronavirus continues to dominate the news, the economic data, and the public consciousness, and this week continued the trend of ongoing uncertainty. It remains to be seen how long it will take the U.S. to get the outbreak under control, but this week we saw some encouraging steps from the federal government to help offset some of the negative effects with new fiscal and monetary policies aimed at providing relief. Although more efforts are likely to be necessary as the virus progresses and more economic data becomes available, this is a positive step that will have economic and psychological benefits for consumers and investors.
- Congress Likely to Pass Major Fiscal Stimulus Package: On March 25th, the Senate passed a third round of fiscal stimulus totaling roughly $2 trillion, which is unprecedented in its size.The package now moves on to the House of Representatives. This includes direct payments to Americans below, expanded unemployment insurance benefits, small business loans, funding for hospitals, and credit funding for states and municipalities, among other provisions. Also in the package is a provision for forgivable SBA loans. C.A.R. worked with NAR to ensure self-employed independent contractors may qualify for this forgivable loan program.This will help to offset some of the negative impacts associated with large parts of the nation shutting down economically for an unknown duration, but that unknown duration also makes it uncertain whether this stimulus will be enough. The fiscal response is unprecedented, but so is the magnitude of the potential impacts.
- Federal Reserve Makes Significant Move to Backstop Credit Markets: Earlier this week, the Federal Reserve went well beyond the level of intervention seen during the 2008 financial crisis. Not only have they dropped their benchmark interest rate to near zero, they also announced plans to provide liquidity to several key markets including the MBS market (for both residential and commercial MBS), money market facilities, and corporate debt markets—something it has never done before. The goal is to both increase credit availability and to reduce spreads between treasuries and street rates.
- Low Treasury Rates Yet to Transmit Through to Mortgage Rates: In early March, mortgage rates dropped to all time low levels. However, they quickly rebounded into the mid-4% range as originators struggled to keep pace with demand for refinancing as well as a temporary retrenchment in demand in the MBS markets. However, 10-year treasury rates remain below 1% and mortgage rates remain above 3.5% at the time of this writing. Historically, mortgage rates have averaged 170 basis points higher than 10-year treasury yields. However, even with the recent decline of mortgage rates back down into the 3.5% range, spreads are still running roughly 100 basis points higher than normal. This suggests that we cannot count on the benefit of lower rates to bolster the market over the very short run (measured in weeks), but it does suggest that rates will remain low and even decline further over the medium and long term (measured in months and years).
- China Beginning to Improve, With Lessons for U.S. Recovery: One silver lining to the current experience in the U.S. is that economic activity in China, which is roughly two months ahead of the U.S. in its outbreak trajectory, is beginning to see economic activity rebound as the number of new infections has dwindled to near zero. Encouragingly, home sales have begun to pick up as well, and provides some optimism for our potential recovery if we can get the U.S. outbreak under control in a similar timeframe. China’s fastest-growing sectors (pre-virus) began to see improvements within a month of seeing the virus decline. However, certain sectors that were the most affected, such as retail, tourism, and transportation, continue to suffer more than two months after peak infections. Thus, we can expect the economy to bounce back once we are past the outbreak, but some sectors will take longer than others to recover.
- Accelerated Change Will Become Long-Term Benefit to Economy: The Coronavirus outbreak is accelerating changes across our whole economy—including the real estate. Over the long term, this will help the economy to run more efficiently and potentially alleviate some of our housing challenges as the requirement of workers’ physical proximity to their place of employment is relaxed. Adapting to new ways of doing business virtually or from remote locations that still meets the needs of consumers will be essential to not only weathering the current environment, but to succeeding in a future where conducting business virtually becomes the standard.
- Duration of Outbreak is Single Largest Driver of Economic Impacts: Despite the myriad forecasts for the depth of the current slowdown in the economy, every forecast has one thing in common: the longer the outbreak, the worse the economic impacts will be. In some ways, the deeper the contraction of economic activity now could pave the way for a quicker and more robust recovery later if it means that the economy slowed down because people stayed home and thus helped to get the virus under control more quickly. Although counter-intuitive, a sharper downturn in Q2 could be the best medicine for the economy in Q3 and beyond.
- REALTORS® Seeing Increasing Impacts on their Clients: In our third weekly survey of California REALTORS®, the percentage of members expecting their business to be negatively impacted rose to nearly all REALTORS® (96%), which is a marked increase from just 53% two weeks prior. In addition, the percentage of members who have experienced buyers holding back rose to 81% from 54% a week prior with 36% having a buyer withdraw an offer due to Coronavirus. On the sell side, 67% of members have experienced sellers holding back (up from 45% the prior week), with 31% having a seller actually remove a listing from the market (up from 13% the previous week).
- New Listings in California Drop Dramatically in Certain Areas: C.A.R. has begun querying each MLS statewide daily in order to get real-time impacts of the Coronavirus on the California housing market. Over the past three weeks, the number of new homes being listed each day has declined significantly in the past two weeks. However, the effects so far have varied by area with the coastal areas that have issued shelter in place/stay at home requirements down by between 44% in the Bay Area to 29% in Southern California. In contrast, the Central Valley has also seen the daily average number of new listings decline by 15%, with most of that decline coming last week on the heels of the Governor’s statewide guidance.
- Significant Declines in Q2 GDP Projected This Week: Virtually every forecasting shop made further downward revisions to their estimates for economic growth during Q2-2020. There is a wide range of specific forecasts that range from as low as an 8% decline to as much as a 50% drop (as suggested by the Chairman of the St. Louis Federal Reserve). However, the current consensus expects that Q2 will experience the bulk of the decline, with some forecasters calling for ongoing declines in Q3 before bouncing back in Q4, while others expect the recovery to begin as early as Q3.
- Unemployment Claims Expected to Rise Significantly: Last week, unemployment insurance claims rose by 70,000 to a total of 280,000 new claims. That marks a dramatic rise on a percentage basis, but the current outlook calls for between 1-3 million initial claims for unemployment when the data is released for the week ending March 21. Google search traffic for unemployment insurance and unemployment filing appears to support the dramatic rise as does the steep decline in restaurant traffic and hotel occupancy across the nation. This is one of the primary drivers of downgraded forecasts as not only will shelter in place reduce American’s ability to spend and bolster the economy, but the rise in unemployment compounds that effect by giving households fewer dollars to spend overall.
The U.S. is clearly not out of the woods yet, but it is encouraging to see actions being taken to mitigate some of the negative economic impacts associated with the outbreak. Homeowners in particular are likely to need more targeted relief if unemployment ramps up as expected. However, we are encouraged by the timely response at the federal level to the accelerating economic impacts.