Mark Sprague's Market Outlook

Real Estate

Outlook for the Market March 10th, 2020

1. 'Punched in the face': Oil, stocks, bond yields, and bitcoin plunge after crude producers signal a brutal price war. "Russia punched investors in the face as it refused to follow OPEC with further production curbs to match the slump in oil demand caused by the coronavirus breakout."

2. 'A global recession is inevitable': Analysts warn of 'utter carnage' as oil crashes and global stocks tumble. "This will be remembered as Black Monday."

3. The entire US yield curve plunged below 1% for the first time ever. Here's why that's a big red flag for investors. "It signals the market is worried about a global recession and aggressive monetary easing by the Fed."

4. Oil is down 21% after its biggest drop in decades, following Saudi price cuts that sparked a race to the bottom with Russia. Saudi Arabia plans to offer deep discounts on crude after Russia refused to join it and other producers in cutting output in response to coronavirus.

5. Goldman Sachs cuts Brent forecasts to $30. The bank slashed its second- and third-quarter forecasts for the oil-price benchmark, citing coronavirus and the brewing price war between Russia and Saudi Arabia.  (West Texas intermediate WTI fell below $32.00 a barrel)

6. Gold jumps past $1,700 level for the first time in seven years. The precious metal's price rose as coronavirus fears and worries of an oil-price war sent investors scurrying for safe havens.

7. Japan will boost special financing for coronavirus-hit firms to $16 billion. The figure, detailed in a government document viewed by Reuters, is more than triple the amount previously announced.

8. Stocks have tanked. European equities dropped with Germany's DAX down 7.4%, Britain's FTSE 100 down 7%, and the Euro Stoxx 50 down 7.7%. Asian indexes slumped with China's Shanghai Composite down 3%, Hong Kong's Hang Seng down 4.2%, and Japan's Nikkei down 5.4%. US stocks are set to open lower with futures underlying the Dow Jones Industrial Average, the S&P 500, and the Nasdaq down by 4.8% to 4.9%.     

·         What about the local economic impact of the coronavirus.  (There are now over 100,000 cases and over 3,000 deaths attributed to this new virus globally).

Understand that real estate remains a long term asset that historically does not have the rapid ups and downs that the stock, commodities and other shorter-term hold assets have.  (or what we are experiencing the last couple of weeks.)  As of today, I am addressing the short term effects, hoping that this is like most coronavirus outbreaks, it will be a short term outbreak.

Presently, Austin does not have enough shelter ( homes, offices, etc.) as evidenced by the tightness of our market inventories.  So real estate wise, the Austin market should remain robust due to lack of inventory.  Nationally it will be an issue particularly on the coasts where we have seen a year of year sales and appreciation declines due to ramifications from the 2016 tax change.  Texas and Florida have been the recipients of that immigration.

Those builders and suppliers that have Asian / Chinese trade partners should expect shortages/delays due to the closings and work stoppage of those supply chains.

In a larger view, let us understand why markets are reacting the way they are.

1) Uncertainty: Markets don’t tend to like uncertainty. It’s been true in the stock and commodities market over the past week and this week. 

The Dow plummeted 1,800 points at the open, tripping circuit breakers that briefly halted trading at the New York Stock Exchange.  This was expected particularly with the European and Asian markets down.        
Global oil markets are plunging after the implosion of an alliance between OPEC and Russia caused the worst one-day crash (-36%) in crude prices in nearly 30 years. Oil has since recovered some of its losses.  Why is this happening?  China, the world’s largest consumer of oil is not using as much!
18 out of the top 20 national economies were already projected to have a worse year.  (including the US).
Lending rates - Treasury yields across the curve dropped to new all-time lows yesterday due to global coronavirus fears. The only other thing I would add is that despite the 50 bps Fed rate cut earlier this week, the market is still fully priced for a 25-bps cut at the upcoming FOMC meeting on March 17-18. There is a 60 percent estimated chance for a 50-bps cut at the March meeting, and a 75 percent likelihood of a cut priced for June, which would put the target fed funds rate at 0.25 percent to 0.50 percent.
So what is that in English?  We could see another rate cut of ½ a  point.  Which means the federal reserve is lending money to the member banks at .25 or .50.  Which means ... a .75 percent yield on the risk-free U.S. 10-year T-note? Perspective: a retired couple puts their entire $1 million in savings into a security and earns $7,500 per year or $625 per month. Does that even cover their utilities?

It definitely does not promote confidence in the national economy……( it’s better to invest your money elsewhere.. Sadly we are in a better place than many of the top economies in the world.)

2) Severity matters: If this virus doesn’t spread much there might not be much effect on the housing market. But if it begins to spread in mass it’s easy to imagine sellers postponing listing their homes and buyers choosing to sit on the sidelines. Ultimately as we consider the immediate future there’s a huge difference between having a handful of coronavirus cases versus a devastating outbreak like the Spanish flu, 102 years ago.  Keep in mind if we’re dealing with something that ends up being very temporary it’s not likely to have a lasting effect.

3) Consumer behavior: One of the most relevant things to consider is whether the coronavirus starts to affect consumer behavior and confidence. No matter what you think about this whole thing, if people begin to postpone or halt financial decisions, that’s when it can begin to matter more for the economy and housing market. Let’s remember many buyers are already struggling with a feeling of uncertainty/hesitancy about the market,  (with record-low rates) so for some, the coronavirus could end up magnifying that feeling. Are consumers going to dine out fewer times? Will they stop buying stuff? Will they just shop online? Will they sit on the sidelines of the real estate market to wait and see what happens? We’re at the beginning stages of this and we’ll have answers to these questions over time. Obviously, if there was a massive outbreak though it wouldn’t be a surprise to see the housing market stall or decline. In case you wanted to follow consumer confidence closely,  (remember 90 to 110 is healthy.)

4) Previous communicable outbreaks (Swine Flu & Ebola, etc. ): Someone asked if there are any economic stats from previous times when we dealt with other large communicable outbreaks. I’m sure there are, just not easily accessible for this article. So, no we don’t.  Most of these were regional at the time, so definitely a regional effect, but little globally.   

5) The economy:  As stated earlier, locally there is not enough shelter inventory in all channels.  So real estate will probably have another good year.  Locally however many of our restaurants and businesses are dependent on the many festivals and conventions that are part of our history and culture, (SXSW, ACL, F1 races and events, etc. )  their loss of income will definitely be felt.   At this point, it is hard to say how deep that will affect us locally.    Nationally and internationally it is a different story with many economies disrupted greatly due to the outbreak. If you are keeping millions home away from productive factories, it will be felt.  The question is to what extent.  Of the top 20 economies, 18 were not projected to do as well as previous years.   So we will have to see.  Living and working in the center of the country have may have its benefits.  On a gloomy note, yes some of the international economies could enter into a recession. (particularly if their economy is closely tied to China, Italy and other larger infected economies.  That’s a sensational idea bound to get lots of attention. Is it real? We’ll see what happens.

6) Rates – ‘How low can you go?’ As stated earlier, we are in economic territory that carries concerns.  But the good news is those waiting for rates to lower need to jump in!  If anything. With rates this low, an already competitive market will be even more competitive.  For you that don’t follow the economic strengths and weaknesses of the market.  It’s been a robust start of the year in terms of real estate and the separate channel's growth in Austin.    But for now, buyers and sellers seem more focused on low rates than the coronavirus, but let’s keep watching because that could change.

7) looking at the data: Hopefully, this will all blow over and we won’t have any worst-case-scenarios play out. If you want to watch real estate data though, be sure to pay attention to the number of listings and sales volume – not just prices. Also, look to see if we begin to have rental concessions.   Both are signs of a softer market.  Locally, hopefully, we are a long way from there.  Prices are the last place we see change show up even though it’s usually the first place we look. In other words, we see a market shifting first in consumer sentiment, what is happening with listings, whether homes are selling, and then eventually down the road with price changes.

Underlying all of these observations? Some take-aways:

Facts prepare you and give you a basis for an appropriate response to evolving events.
Don’t panic.   A measured and analytic response should be more profitable, particularly long term.
Your 2020 may not work out as you'd planned and believed in as recently as four weeks ago.  Personally I think it may be better in the local real estate channels.
Much of the turbulence/concern, is on the demand and supply sides of the housing equation, is timing. The good news is that people in housing / real estate are used to dealing with hard news.  It truly is how you handle it, whether it's successful or not.
I hope this helps and I hope 2020 and the following years continue to be what we thought they would be at the start of the year.

MS