When the novel coronavirus (COVID-19) emerged, initially in central China, most viewed it as a substantial threat to that economy. However, the pandemic then spread into Italy and eventually across Europe. Then came government policies that locked down modern life as the virus spread in the United States. At first, most economists predicted that this will cause the global economy to contract slightly this year before it improves by June. This view, however, seems too positive right now as there is no denying that the impact of the coronavirus on the global economy is troubling. More and more economists are now warning of a coronavirus recession in the US, Europe, and globally. The first to reflect this economic alarm was the brutal stock market crash that happened in early March 2020 when the S&P 500 fell 12.5% – its worst drop since the 2008 recession.
This has left many to ask: are we headed for a recession? How could this impact the US housing market 2020 and beyond? In this article, we present the opinions of economists and experts in the housing market regarding this current economic crisis and how bad will the 2020 recession be. Moreover, we explain the effect of coronavirus on the US real estate market and what all of this means to you as a property investor.
But first, for those who are new to this, let’s answer the basic question of what is a recession? The National Bureau of Economic Research (NBER), defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.
Will the Coronavirus Cause a Recession?
As COVID-19 containment measures bring entire sectors of the global economy to a halt, most economists have come around to that view. Last week, the International Monetary Fund (IMF) didn’t mince words about its dire outlook for a coronavirus recession and its financial challenges. In January, the Washington-based organization had forecasted an optimistic global GDP (Gross Domestic Product) expansion of 3.3% for 2020. By contrast, the IMF now expects the global economy to contract by 3% as countries around the world shrink at the fastest pace in decades. This is much worse than during the 2008–09 financial crisis. In its World Economic Outlook for April 2020, the IMF’s Managing Director, Kristalina Georgieva, made the following statement:
“For 2020 it is negative – a recession at least as bad as during the global financial crisis or worse. But we expect recovery in 2021. To get there, it is paramount to prioritize containment and strengthen health systems – everywhere. The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be”.
According to their outlook, the COVID-19 pandemic is set to leave 170 countries with lower GDP per capita by the end of the year. If the pandemic eases throughout this year, the IMF forecasts a “partial recovery” in 2021 keeping in mind that growth in advanced economies would not get back to its pre-virus peak until at least 2022. However, should COVID-19 last through 2020 and resurge in 2021, this could leave global economies struggling for years to come. Gita Gopinath, IMF’s Chief Economist, described the coronavirus pandemic as a crisis “like no other” and warned that a coronavirus recession could knock $9 trillion dollars off global GDP over the next two years. Gopinath wrote:
“It is very likely that this year, the global economy will experience its worst recession since the Great Depression, surpassing that seen during the financial crisis a decade ago”
The IMF now expects the US economy to contract by 5.9% this year, representing the biggest annual decline since 1946. The unemployment rate in the US is also expected to jump to 10.4% this year. Georgieva emphasized the importance of getting ahead of the economic crisis. Major economies like the US already released trillions of dollars in coronavirus stimulus packages and mortgage relief programs. But, Georgieva added that extensive aid needs to be kept in check for long-term recovery. And speaking of recovery, the IMF predicts the US to see a partial recovery in 2021 with expected growth of 4.7%.
Why the Coronavirus Recession Could Last Long?
The fact that every inhabited part of the globe is now in trouble due to the pandemic enhances the sense of alarm of a devastating coronavirus recession. Fears are also growing that this financial crisis could last longer than what economists initially thought. Some real estate investors, however, are still attached to the hopeful scenario that COVID-19 will cause a painful but short-lived recession. That the global economy is only in a temporary freeze and will recover with the end of coronavirus pandemic this year (a V-shaped recovery). However, for that to happen depends on stimulus packages proving effective — not a sure thing. Also, even after the end of the pandemic (which no one knows when that’ll be), the world that emerges is likely to be choked with issues that challenge the recovery.
The main reason why economists believe a global coronavirus recession will last long is that consumers are changing their spending behavior. It’s what consumers think and do that causes the economy to grow or shrink, not bank failures or layoffs at airlines. Consumer spending amounts to 70% of economic activity worldwide and they’ve already been on edge – that won’t just bounce back in a few months. Besides, in a typical economic shock, governments will spend money to encourage people to go out and spend. But in this crisis, authorities are urging people to stay inside to limit the spread of the virus. If this anxiety endures and people hesitate to spend, it’s going to limit economic expansion. Consecutively, this morphs the nature of this economic crisis from temporary to something a bit more lasting.
How Long Could a Coronavirus Recession Last?
Wondering how bad will the 2020 recession be? Well, as long as human interaction remains dangerous, businesses can’t return to normal. Governments are also intensifying restrictions on businesses to stop the spread of the pandemic and millions of people are filing claims for unemployment benefits. Also, as fears of the virus reconfigure the very concept of public space, some social distancing measures could remain indefinitely. With all of this, it’s not surprising that the rate at which consumers have been spending is already slipping. In turn, this is hindering a consumer-led economic growth. Finally, a plunge in commodity prices – especially oil – is also hurting the economy in many countries.
In optimistic coronavirus news, China has effectively contained the virus and is beginning to – gradually – get back to work. Some would say if Chinese factories spring back to life, this will ripple out worldwide. However, China’s industry is not immune to a global economic recession. While Chinese consumers are an increasingly powerful force, they can’t spur a full recovery. If the United States and the rest of the world are still dealing with COVID-19 and an economic crisis, this limits the appetite for Chinese products. A virus-ravaged nation is unlikely to see an upswing in consumer confidence and spending. In other words, who exactly will Chinese factories sell to? Since the coronavirus recession is affecting every region of the world at once, a global recovery could be U-shaped and take two to three years according to most economists.
The Effect of Coronavirus on Real Estate
Recessions naturally produce government reactions and public responses that, in turn, strongly affect real estate. So how can all of this affect the US housing market in 2020 and beyond? Most experts predict that this time, we won’t see massive foreclosures and drops in home prices that happened after the 2008 recession. Instead, the effects of the coronavirus recession are much more likely to be good for real estate investors. Here are the top US real estate market trends and predictions according to experts:
#1 Lower Interest Rates
The Fed had already cut interest rates twice in March and many believe the government will push interest rates even lower. This means that financing an investment property with a mortgage loan will be cheap. In spite of lower rates, data from the Mortgage Bankers Association show that the volume of mortgage applications for loans used to purchase homes was down 24% compared with a year ago. Since banks are heavily dependent on consumer loans, they now have a large incentive to shift more money into real estate investments. And according to Forbes, lower mortgage rates also mean that returns on alternate investments (like bonds or CDs) will remain poor. As a result, investment funds and other sources of money will also welcome real estate projects.
#2 Increasing Demand for Rentals
As unemployment rates in the US expected to increase, more people will need (and want) to rent. In fact, the homeownership rate for young adults has already been declining to around 35% according to Forbes. Now, with income stalled, home prices high, and more people with debt living in expensive big cities, that trend will continue. In addition, because there hasn’t been enough home construction in the past decade, there is already a demand for rental properties. Even though demand will flatten for a while, it will increase for years after the end of coronavirus pandemic. As an investor, you don’t need to rush your search for real estate deals and bargains. Now is the best time to take your time to find markets and rentals that’ll best suit your financial goals.
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#3 Markets React Differently
The effect of a coronavirus recession will be different for real estate markets around the US. Having a high number of COVID-19 cases doesn’t necessarily make a housing market more likely to be impacted. Based on a report by Attom Data Solutions, some counties are more vulnerable than others to an economic recession caused by the pandemic. The firm analyzed markets based on several factors like the share of homes that had a foreclosure notice and the percentage of homes where owners owed more on their mortgages than the home was worth. Overall, the firm concluded that many of the housing markets most likely to be affected by the coronavirus were located in the Northeast and South. Few markets were located in other parts of the country as well.
You can read how the coronavirus is affecting major real estate markets in the US like the New York housing market, the Washington State housing market, the California housing market, and others on the Mashvisor blog!
#4 This Isn’t Like the 2008 Recession
Economists were quick to point out the differences between the current US real estate market and the one that collapsed in 2008. Back then, there was a surplus of housing inventory, an overproduction of new construction, and buyers could more easily get mortgages. We don’t see those trends in 2020. Plus, it was the housing market itself that caused the financial crisis which, in turn, caused the 2008 recession. Whereas for now, we know for sure that the cause of an economic recession is not the housing market. In addition, because there’s a shortage of homes, experts say it’s more likely that home prices will remain steady and not drop that much causing a housing market crash.
The Bottom Line
While a coronavirus recession is not like the 2008 recession, many economists believe its impact could be far more severe. The IMF warned that there were severe risks of a worse outcome if this goes on for a long time. So, despite the fact that a longer lockdown will limit economic activity, the IMF said quarantines and social distancing measures were vital. It said: “Upfront containment measures are essential to slow the spread of the virus and allow health care systems to cope and to help pave the way for an earlier and more robust resumption of economic activity”. The managing director of the fund added that “saving lives and saving livelihoods go hand in hand with stopping the pandemic”.
At Mashvisor, we help real estate investors make wise decisions, which is important now more than ever. We’ll keep you up to date on the latest coronavirus news and the US housing market 2020.