Black Swans and Toilet Paper

March 14, 2020

How is the COVID-19 affecting the real estate market? This has been the question burning on my mind. That and Black Swans. The black swan theory is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. That is my feeling right now.
 
So, what we have seen is a week that looks very much like something we have seen before. To me, it looks a lot like September 11th where financial markets shut down and when they did open up, we saw tremendous declines in stock prices. It left everybody wondering: How is this going to filter out into the housing market? Will what is happening today going to look like 2008 (i.e collapse of Lehman Bros) or is it going to look like 2001?
 
In 2001, the real estate industry never really experienced a decline. If you go back and look at the numbers from 2001, home prices continued to go up and housing market activity continued to stay strong. It was an uninterrupted expansion of the housing market which began in 1991 and went all the way into 2006. 2008 was an economic crisis and housing was at the epicenter. It began there and then spread out.
 
What we are experiencing now is fundamentally different and has been a direct result of the fact that our world is now very economically interconnected in a way that it was not even in 2008. China is the starting point of much of our consumer goods and even raw materials. This was the issue worrying investors last month. China seems to be inching back now. Adding to the confusion is the fact that Russia is now making a move on US Shale oil producers by breaking OPEC Quotas forcing the Saudis to follow suit. Cheap gas may be good but this highly leveraged sector may start defaulting on its loans if this persists.
There is no getting around the short term impacts of our enforced travel halt and all the halted economic activity. Still, some perspective is called for. Tourism, which is in the crosshairs, accounts for 2.6% of the US GDP according to Trading Economics. That is less than 3% of our GDP in a 22 Trillion Dollar Economy. Since Real Estate is also not in any way the underlying issue it is not remotely comparable to 2008. It may have a much better parallel to the 2001 recession. In all probability this will be a Black Swan of economic events. It’s causes will pass though, unlike 2008 which took years to de-leverage. I would not expect to be scooping up better deals by just waiting longer.
The real problem is uncertainty and fear. When we have adapted and slowed the spread to a rate our health system can manage, things will likely pick up and will learn to live in this new reality. It does seem reasonable to assume that after we work through a few tough months we will emerge with fundamentals intact. It is worth pointing out that in the hardest-hit states in the nation, such as Washington, real estate brokers are reporting that homes are still being bought and sold like normal. Also there are more than a few people that think real estate is as good a bet as cash right now.
This of course can all change, I’m just a Realtor not an epidemiologist. But I will tell you this – I was practicing real estate during the downturn of 2008 and I witnessed a lot of level headed and logical people make very good real estate and financial decisions. At the end of the day, you have to determine what is right for you. My role is to provide you with hyperlocal context. It is simply not rational that people are waiting for the toilet paper deliveries at Costco at 9AM! At some point soon people will realize they have enough toilet paper. 
 
Wash your hands with anti-bacterial soap. Stay home if you are sick and for the love of God Almighty – if you are thinking of buying a house, please take advantage of the low interest rates!
 
If you have any real estate-related questions or if you want more specific stats on how our market is performing, please reach out to me anytime. If you feel sick — we can do it by text! LOL

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