With COVID-19 messing up our world economically and personally, it’s right to wonder what’s happening with real estate in this situation.
The answer: nothing.
Well, not quite, but almost.
There has been a huge pull-back in the market, as everyone backs off to take a wait-and-see attitude. Both Buyers and Sellers have decided, en masse, to sit tight, to delay their intentions.
The Vancouver Real Estate Board reported that April was the slowest April in almost 40 years. But the prices remained stable (in fact rose, just a hair.) When there is a surplus of Sellers in the market, prices tend to go down. When the surplus is Buyers, prices rise. In this case, because there were so few of either, prices remained stable.
The REB pointed out that the magic numbers are between 12% and 20%. When fewer than 12% of listings sell in any month, there is a surplus of Sellers. When more than 20% sell there is a surplus of Buyers. Between that range, the market is considered balanced. In April, the number was just over 12%.
So, the only ones who were significantly impacted were realtors, themselves.
But the final chapter has not yet been written. The effects of this crisis have not fully infiltrated the economy, and likely won’t for a while yet. Real estate prices may yet dip due to the tougher financial environment.
Meanwhile, the stock markets took huge plunges even before we hit our big crisis. They started diving in mid-February and reached their lows about March 20, just as we were starting our lock-downs. They’ve already recovered about half their losses.
Stock markets are said to be “leading indicators” of the economy; real estate are “trailing indicators.” Stock market trends are based on anticipation. Because they are quick in-and-out, the financially savvy anticipate what might happen and act very quickly when there is anticipation of factors hitting the economy. They anticipated the coming crisis and acted “before the fact.” (This is why stock markets rarely react much to interest rate drops; informed investors have already anticipated the announcements and made their moves in advance of them.)
Lots of stock market investors, the uninformed and those “slow on the trigger” lost a lot of money when the markets took their nearly 40% dip two months ago. Some are making it back now. Savvy investors made money on the way down and are now making it again on the way up.
Real estate, on the other hand, is much tougher to get into and out of. If you decide to sell, it would be rare that you would get your money out of a real estate property in less than a month, even if you got an accepted offer on the first day it was listed. The cycle is usually more like 2 or 3 months.
The much slower cycle not only allows, but actually dictates, that it follows what has already happened in the economy. There is a lot more certainty in the decision-making. Investors don’t want to lose, so if the economy has dipped, they will simply not sell, but wait it out. At the same time, Buyers are wary of buying in uncertain times, the result being it’s mostly the desperate Sellers and Buyers making transactions. And there aren’t enough of them to influence the market too much.
So, the real estate market, while also fluctuating like the stock market, is much less volatile. The dips and peaks are less dramatic, and the cycles much slower. (When have you ever seen a nearly 40% drop in real estate in just over a month? It just doesn’t happen.)
It follows, then, that stock market investing is generally much riskier than real estate investing. This has proven true throughout history. In times like these, even the “safest” stock market investments—mutual funds and exchange traded funds—fare very badly. Real estate rides out these fluctuations and generally provides far greater returns than such conservative funds—in bad times and in good.
Real estate investors are minimally impacted by the current crisis, as long as their tenants pay their rent.
Home ownership is the first building block of real estate-based wealth accumulation. More and more people are learning this, are doing whatever it takes to get into home ownership and start building their economic well-being. This, itself, is a factor in driving up housing prices in this area.
And reasonably maintaining those prices through economic downturns like the one we’re in now.
At least, that’s how I see it . . .
