Many people are panicking about the coronavirus (including, specifically, my mother who has been sending me hourly text messages to stock up on canned goods and bottled water.)
I live in New York City and often ride the subway and find myself in crowds of people, so if avoiding sputum and infected people are my main objective, then I have already failed. I am definitely one of the many people who the Atlantic has predicted is “likely to get the Corona Virus.”
But seriously, we can’t just shrug off the Nervous Nellies anymore after watching the stock market tank by more than 6% over the past two days. Maybe it’s time to start taking this thing more seriously and thinking about what the near-term implications could be for our business: urban residential real estate.
So, today’s Compound Scoop tackles this potentially polarizing topic:
What does a potential pandemic mean for urban residential real estate prices?
In a panicky environment, investors tend to pull money out of the stock market and pile into “safe haven” investments like bonds. This drives up bond prices and drives down interest rates.
For example, on January 1, 2020, 10-year treasury yields were at 1.90%. By the end of January, they had fallen to 1.50%. Yesterday, they closed at 1.35%, the lowest they’ve been since the summer of 2016. The 30-year rate is behaving exactly the same way: falling and hitting record lows.
When interest rates decline, mortgage rates also tend to decline. This generally leads to an increase in housing prices, because buyers can afford to borrow more money.
However, unlike previous “black swan” events that have rattled the markets, this pandemic has a unique physical implication: it drives people indoors amid advice to “shelter in place” and quarantine. This could prevent homebuyers from attending open houses or looking for new homes. This pandemic is also hitting right as the spring home-buying season begins, which may lead to lower sales volumes especially if this behavior of avoiding people and crowds takes hold for more than a few days. (We view this possibility as highly unlikely.)
In cities like New York and Miami, where sales are already sluggish and have been for awhile, we believe that this turn of events presents a unique and timely entry point into the market. Although sophisticated populations tend to be more cynical and therefore less prone to 24-hour-news-network-induced panic, we still predict that most buyers will sit on the sidelines as they wait for this event to play out a bit more.
There is already some early proof of our theory since publicly-traded single-family home REIT prices have followed the stock market’s general trend over the past few days, albeit not as precipitously. For example, Invitation Homes (NYSE: INVH) and American Homes 4 Rent (NYSE: AMH) which both own single-family home portfolios, have declined in price.
To summarize, this pandemic on top of an already shaky housing market means that sales will remain sluggish and that desperate sellers will slash prices to find the few buyers who are active.
Warren Buffett has famously said, “Be fearful when others are greedy, and greedy when others are fearful.” We take this advice to heart.
Panic creates buying opportunities for shrewd investors, and Compound is very much in the market right now.
It’s a particularly interesting time to consider entering urban residential real estate--but not one suited for the faint of heart.
-- Janine Yorio, CEO/Co-founder, Compound