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Update on Coronavirus Market Impacts

The number of confirmed COVID-19 (“Coronavirus”) cases continues to rise rapidly and the social and economic impacts are becoming more evident and more pronounced. Given the recent hit to financial markets, the decline in consumer spending, and the rise in new unemployment insurance claims, the California Association of REALTORS® has revised its forecast lower for the economy generally and the state’s housing market specifically. This downgrade of our forecast was larger than initially envisioned and stems from the likely slowdown that will occur as events are canceled, TV production is halted, vacation/travel plans get postponed, and many of California’s residents shelter in place, work from home, or otherwise self-quarantine—all of which will impact business, employment, consumer spending, and thus, the housing market.

1. C.A.R. Forecast for Economic Activity Downgraded: Due to the recent decline in consumer spending (as measured by February’s retail sales figures) and the sharp rise in new unemployment insurance claims, C.A.R. expects the U.S. economy to dip into recession with GDP shrinking in both the second and third quarters. The consumer spending numbers provide cause for concern as they decline occurred before the outbreak had really begun to accelerate during the first two weeks of March, which suggests that the March retail sales figures will fall even more. In addition, consumer spending has accounted for nearly 80% of economic growth in the past two years. Therefore, the decline in spending has increased the probability of Recession.

2. Economic Impacts Will Affect California’s Housing Market: C.A.R. is forecasting that the benefit of lower interest rates will be outweighed by deteriorating consumer confidence, the slowdown in economic activity, and projected increase in unemployment. As a result, our current baseline forecast expects that existing home sales will fall by roughly 8% in 2020 compared with our original forecast from the winter of 2019, which called for a modest increase in closed sales this year.

3. Home Price Growth in California Will Also Be Impacted: Lower mortgage interest rates should provide some relief to homebuyers in the form of increased purchasing power, which will put upward pressure on home prices. However, the deterioration of financial markets has made investors less wealthy, which will reduce demand for luxury properties, second homes, and investment properties, which will exert downward pressure on home prices—particularly at the top end of the market. In addition, economic uncertainty and expected job losses will also reduce demand for homes and place downward pressure on home prices. Some investors will look to real estate as a potential hedge against further stock market losses, but C.A.R.’s latest forecast expects that the net effect of these competing forces will be to push price growth negative into the mid-single-digits for 2020.

4. The Outlook Amongst California REALTORS® Has Deteriorated Significantly in Just One Week: C.A.R. conducted a weekly survey of nearly 1,000 members between 3/13/20 and 3/16/20 for the second consecutive week. The percentage of REALTORS® expecting negative impacts due to the Coronavirus leapt up dramatically to more than 78% from just 53% of members the prior week. Open house traffic is expected to suffer the largest impact, but there were also significant increases in the percentage of members concerned about negative impacts to time on market, closed sales, and the number of new listings. More than half of members have experienced buyers

holding back and 45% have experienced sellers holding back, with 13% of respondents actually having clients withdraw a listing from the market entirely.

5. Californian’s Sentiment Towards Housing Starting to Sour: C.A.R.’s Housing Sentiment Index, which is a survey of California consumers conducted between 3/6/20 and 3/8/20, increased by 4 points to 77. This was driven almost entirely by the significant decline in mortgage rates during that week as respondents believing it is a good time to buy jumped from 47 to 58 and those expecting rates to increase over the next year increased dramatically from 82 to 122. However, fewer Californians thought it was a good time to sell. They were also less optimistic about whether prices would continue to grow (104 down from 119 in February), whether the economy would improve over the next year (55 down from 62 last month), and whether it would be harder to find a home this year (72 up from 61 in February).

6. Wealth Effects Intensify as Financial Markets Continue to Slide: Instead of being encouraged by the Federal Reserve’s proactive emergency rate cut meant to boost the economy, financial markets started the week with steep declines that have persisted through mid-week. This creates macroeconomic effects on spending, business investment, and potential hiring/staffing decisions, but it will also have more direct effects on California’s housing market as many consumers rely on stock market wealth as a source of funding for luxury homes, second homes, and investment property. At the time of this writing, the Dow Jones and S&P 500 indices had given up more than 3 years of growth with the Dow dropping below the benchmark 20,000 level for the first time since the beginning of 2017.

7. UCLA Anderson Forecast Projects Economy Already in Recession: C.A.R. is joined by several other forecasters in calling for a weaker 2020 than they originally envisioned as UCLA announced that the economy is already in a recession. In addition, under some very plausible assumptions, Wells Fargo’s recession index places the probability of a recession this year at a near certainty. It is important to note that although the next two quarters are expected to see a sharp drop, the recession is currently expected to be short-lived. The backdrop of the pre-outbreak economy is also important to keep in mind as we entered this crisis on a solid economic footing and our current troubles are being driven by external factors rather than by the unwinding of major imbalances in the underlying fundamentals. This will not insulate the economy from negative effects but should help the inevitable recovery to proceed more quickly than it did in 2010.

8. Federal Reserve Issues Second Emergency Rate Cut: In a surprise move, the Federal Reserve issued a second emergency rate cut over the weekend, lowering its target interest rate by 100 basis points to near-zero. Unfortunately, this move created additional concern in financial markets, which are down sharply this week and have given up more than 3 years’ worth of gains at the time of this writing. And, although the Federal Reserve’s benchmark rate does not correlate very well with mortgage rates, the 10-year Treasury, which has historically mapped much closer to mortgages, suggests that we can expect rates to remain low and potentially fall even further into the low-3% range.

9. Potential Relief from Fiscal Stimulus on the Horizon: The Whitehouse and Congress are currently in negotiations over fiscal stimulus aimed at mitigating the downside effects of the Coronavirus. Though no specific plan had been announced at the time of this writing, suggestions include $1,000 rebate checks issued to Americans, forbearance of estimated tax payments for small

businesses, spending on medical supplies and vaccine development, expansion of unemployment and SNAP programs, and emergency paid sick leave. It is likely that the amounts requested, and the variety of programs will be expanded as more March-oriented data becomes available.

10. California Faces Mid-Level Economic Exposure in Severely Impacted Industries: With the closure of bars, restaurants, and event centers, as well as shelter in place ordinances cropping up across the state, the Leisure and Hospitality sector is expected to be the hardest hit. Although this industry represents a relatively small share of California’s Gross State Product (GDP equivalent), it does represent a sizable proportion of the state’s employment base at 11.6%. That places California as the 12th most exposed state from a jobs perspective, though the impacts in California should be lower than in states like Nevada and Hawaii where tourism and restaurants represent one out of every 4 or 5 jobs, respectively.

Emerging trends over the past week have led C.A.R. to a less optimistic forecast for both the economy and the housing market in 2020. The current outlook calls for fewer home sales in 2020, a significant, but short-lived, recession extending through the summer, and downward pressure on home prices as negative economic impacts and deteriorating consumer confidence outweigh the benefits of lower interest rates. However, things continue to develop rapidly on both the consequences and the potential policy relief that may be enacted. As such, this forecast will likely be revised further in the coming weeks and months as more data becomes available.