I hope you are enjoying this beautiful weather and have been able to experience it in Tahoe. The roads are clear, the skiing offers ideal spring conditions, and the decks are filled with sunshine. Clear roads have also made it easy for property tours. The recent drop in interest rates has inspired many sophisticated and savvy buyers to take advantage and purchase their vacation home in Tahoe. Just this week, 17 properties in Truckee went under contract.
Despite the beautiful weather and momentum in our Tahoe real estate market, there are some buyers and sellers who are concerned about the coronavirus and the uncertainties around how it will ultimately impact our real estate market. So, let’s talk about the elephant in the room….
There’s no question that the uncertainty around the coronavirus is causing some turbulence in the global economy and domestic financial markets. However, there are two sides to this coin. Some buyers are scared and putting their purchases on hold, while others recognize this as an incredible opportunity. Buyers who are purchasing now are doing so to take advantage of historically low interest rates, and they see the uncertainty as an added incentive to make offers hoping to capitalize on sellers’ increased motivation. I’ve also had several conversations with buyers making statements like “Where else are we going to put our money? Not in the stock market.” and “All the more reason to purchase a vacation home in Tahoe to get out and enjoy time with family.” Whatever the reason, we are not seeing a standstill in purchases of vacation homes in Tahoe.
Not only are buyers influenced by the uncertainty, but so are sellers. Hence, the opportunity may be there to strike a better deal now, while they are nervous. That being said, there are sellers who also feel that the coronavirus panic is exactly that – “a panic” – and it will pass. Furthermore, they see the lower interest rates having the positive result of creating more demand and urgency for buying real estate and are holding firm on their prices. It all depends on the psychology of the individual buyer and seller, but we are definitely seeing an uptick in property tours, offers being made and properties being put into escrow.
The California Association of Realtors just released an article that listed their “Top 10 potential impacts that could elicit questions from buyers and sellers over the near term.” I’ve highlighted a few that I found helpful and relevant to our Tahoe market:
Forecasts Have Been Downgraded, But Few Economists are Calling for Recession Yet: Last week, the International Monetary Fund (IMF) cut its forecast for global economic growth by 0.1%, but is still calling for an expansion in 2020, albeit at a slower pace. Similar orders of magnitude have been forecast for the domestic economy, with groups like Wells Fargo and others expecting GDP to grow by 10-20 basis points slower than their pre-coronavirus forecast. Growth is expected to be slower, but the economy is still expected to grow.
Mortgage Rates Will Likely Remain Low, Or Even Fall Further As A Result of Coronavirus: The Federal Reserve issued an emergency 50 basis point cut to their target interest rates, and guidance suggests that the Fed may be open to future reductions in order to counteract the negative impacts to financial markets. This should help to reduce the cost of borrowing and make housing more affordable over the near term, which should help to offset some of the negative impacts to housing demand associated with rising uncertainty.
Domestic Buyers May Be Discouraged By Rising Uncertainty and Recession Risk, But Is It Still a Good Time to Buy?: This week, mortgage rates fell to an all-time low level of just 3.13%. That is down from 3.80% at the start of the year and represents significant cost savings over the life of a 30-year loan. For buyers who can afford their monthly payments, the economic uncertainty that is driving rates lower provides an opportunity to capitalize on significantly reduced borrowing costs that they will enjoy for years to come. Short-run risks to the economy exist but are arguably offset by long-run benefits of lower rates at the individual level.
Financial Market Volatility Could Reduce Demand For Luxury Homes, But Also Create Potential Opportunities for Luxury Home Buyers: The recent turbulence in financial markets has already impacted household wealth. This could reduce demand for luxury homes in California in particular. However, with less luxury buyers, there could be opportunities for price discounts for buyers who choose to remain in the market for high-end properties. Real estate may also act as a buffer against potentially larger declines in the financial markets.
New Home Construction in California Could Slow Further, Exacerbating Already-Tight Supply: Many of the inputs to California’s Building Industry are sourced from Asian countries including China. As the coronavirus disrupts these supply chains, the cost of those materials may increase over the short run or become limited, which will increase the cost of construction and potentially reduce the pace of new residential development below its already-lackluster pace in 2020.
Low Rates and Fewer New Homes Constructed Should Place Upward Pressure on Home Prices: Improved affordability stemming from lower rates combined with fewer new homes being constructed as the construction supply chain is impacted could lead to more upward pressure on home prices in California. Unsold inventory is already at low levels, and reduced construction activity means that is likely to continue—especially if buyers respond to lower rates.
Offsetting Effects Leave C.A.R.’s Housing Market Outlook Unchanged, For Now: The situation remains fluid, and conditions could deteriorate beyond what is currently envisioned depending on the severity and duration of the outbreak, but if current economic forecasts of modest declines in GDP growth are realized, the effects of lower rates should help to offset the effects of a slower economy and increased economic uncertainty such that California would still achieve a modest improvement in both home sales and prices this year.
It’s clear that the coronavirus will have an impact on the economy and the real estate market in 2020, but it is also clear that it is not time to panic. Furthermore, it is certainly creating an opportunity for buyers.