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.
Short-term effects: The luxury market could slow on the coasts
Recently, the luxury market hasn’t been in the best of health—and some 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.”