By Clare Trapasso | Feb
6, 2020
The deadly outbreak of the coronavirus from
China, which has sickened thousands around the world and terrified millions
more, is taking a toll on global financial markets as well—and the effects are
likely to extend to the U.S. luxury real estate market.
While there are only 11 confirmed cases of the
virus on American soil, the U.S. housing market is already feeling the effects
of what could soon be declared a pandemic. Mortgage interest rates have dipped,
and the already sluggish luxury real estate market has depended in recent years
on an injection of Chinese buyers.
"China has been the most important source
of foreign demand for real estate," says Lawrence Yun, chief
economist at the National Association of Realtors®. Wealthy Chinese buyers
often purchase luxury properties, such as high-rise condos, in California and
New York. "The upper-end market can expect to be softer as a result."
Buyers from China spent about $13.4 billion on
U.S. homes from April 2018 through May 2019, according to the NAR's most recent
data on foreign buyers. While that may sound impressive, it actually represents
a 56% drop from the previous 12-month period. Chinese buyers have been spending
less on U.S. real estate as their government has tightened rules on how much
money can leave the country, U.S. immigration rules have tightened, and trade
talks between the two nations have heated up.
But with the temporary ban on any foreigners
who have been in China in the past two weeks, and cancellations of many flights
from China to the U.S., a lot of would-be Chinese buyers can't get into
America, putting any home-purchase plans they may have on ice.
"You have less incentive to buy real
estate if it's unclear if and when you'll get to visit the property," says
Chief Economist Danielle Hale of realtor.com®. "In the
short term, the virus could dampen [luxury] sales further."
Why is the coronavirus
pushing down mortgage interest rates?
It may seem perplexing that a virus that
originated in China (and where most of its nearly 500 fatalities occurred)
could result in lower mortgage interest rates an ocean away. Thank
globalization. China is the world's second-largest economy, with a worldwide
supply chain. So what happens there affects businesses around the world, which
then affects global financial markets. Amid market turmoil, investors tend to
pull money out of the stock market and park it in safer, more stable U.S.
Treasury bonds. And when bonds are strong, mortgage rates fall.
Rates dipped 9 basis points to 3.51% for
30-year fixed-rate loans as of Jan. 30, according to Freddie Mac. The panic
surrounding the disease could keep them low, or even push them lower. The only
thing in recent memory to compare it with is the outbreak of severe acute
respiratory syndrome, or SARS, in late 2002 and early 2003. During the
resulting panic, mortgage interest rates also dipped.
"SARS was barely a blip in the U.S. real
estate market," says Yun. But there weren't nearly as many Chinese buyers
shopping for homes in the U.S. back then. "We don't know what's going to
happen."
There could also be a downside to lower
rates—while they will likely spur more buyers to get into the market at a time
when buyer activity is already ramping up, sellers may respond by boosting
their list prices.
folks fear the coronavirus scare could cause a
relapse. The market was just beginning to pick back up, as buyers enticed by
low mortgage rates were beginning to pick up pricey properties again. Then the
virus hit.
(Realtor.com defines luxury as $1 million-plus
homes in most of the country, although that threshold can be higher in the most
expensive cities like New York and San Francisco.)
Real estate broker Amy Kong is
seeing fewer folks attending open houses marketed toward Asian buyers. Kong is
a real estate broker at Realty World Advance Group in San Bruno, CA, and the
president-elect of the Asian Real Estate Association of America.
"People would rather not go out and
mingle," says Kong, who has heard some closings had to be postponed.
"The buyers can’t be here physically to sign. They have to make other
arrangements.”
That won't be too catastrophic, though, as
many of these affluent foreign buyers have representatives in the U.S. who can
act on their behalf and usher through the paperwork.
Some wealthy non-Asian buyers, on the other
hand, are worried about their prospective neighbors.
"Clients looking at new condos are asking
us what is the percentage of Chinese living in those buildings," says
luxury real estate broker Dolly Lenz, who is based in New York but
sells properties around the country. Three unrelated clients asked her this
question, which she was legally unable to answer due to fair housing laws.
"That was shocking to me."
But Patrick Carlisle, chief market
analyst for the San Francisco Bay Area at Compass, believes concern about the
coronavirus affecting real estate sales is overblown.
"I don’t think it will have any impact
unless it turns into a worldwide disaster," he says. "People locally,
I can't see them changing their plans one way or another unless it gets much
worse."
Long-term effects: The
U.S. luxury market could see a boost
While the outbreak may make it more difficult
for Chinese buyers to pick up U.S. properties for now, it could be a boon for
the luxury market in the long term.
“[Chinese] people who are wealthy may feel
tired of the perception of China as being a third-world country," says
NAR's Yun. “They want to park their money in a first-class world economy, which
is Australia, Canada, and the U.S. Hence, we may see greater demand from
Chinese, wealthy households.”
For example, more buyers from Hong Kong came
to the U.S. looking for real estate after anti-government protests began last
year in the territory. Since the coronavirus outbreak, luxury broker Lenz is
seeing them become even more motivated to acquire a U.S. property. These
affluent buyers are worried about medical care, strikes, and more unrest back
home, and are looking to the U.S. as a safer option.
Chinese buyers may flock to the U.S. again for
the same reasons. But once the virus is under control, the real estate market
will likely go back to normal, more or less.
“I look at this as something that will last as
long as the virus does," says New York City–based real estate
appraiser Jonathan Miller. "We're uncertain about everything,
and this is just another item to fret about."
Clare Trapasso is the senior news editor of
realtor.com and an adjunct journalism professor at St. John's University. She
previously wrote for a Financial Times publication, the New York Daily News,
and the Associated Press. She is also a licensed real estate agent with R New
York. Contact her at clare.trapasso@realtor.com. Follow
@claretrap
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