By Juan Quimper


As per the World Health Organization, COVID-19 has sickened ~1.3 million people worldwide (and counting) as of April 7, 2020, and has sent U.S. markets into bear territory. Both the Dow Jones Industrial Average and the S&P 500 posted their worst first quarters in history. The Fed cut interest rates twice since the crisis started, down to a benchmark rate of 0%. The Labor Department reported over 6.6 million unemployment claims for the week ending March 28th, and analysts expect those numbers to increase as the weeks go by.

It may seem grim, but it was inevitable. With over 75% of the country ordered to stay at home, many small businesses and institutions have closed their doors completely, and some have rushed to transition to remote operation or changed their business model. The entire world is fighting a pandemic, and there will invariably be change as we progress.

Some sectors — especially tech, consumer staples, and communications services — have survived the macroeconomic turbulence, with others even emerging as winners (Zoom stock went up over 70% between January and April). Essential businesses and services, largely unaffected by closings, have remained operational, and some have even boomed.

While some may argue that it is unreasonable to compare the COVID-19 outbreak to other pandemics, history does reveal that whatever the impact, it is transitory. Zillow’s Research team recently evaluated the effects of previous outbreaks on the global economy and specifically real estate markets, and determined that while economic activity fell sharply during these outbreaks, recovery was quick. Let’s look at them one by one.

SARS — Hong Kong, 2003

When studying the SARS outbreak that started around February 2003 in Hong Kong, Zillow’s research identified a sharp decline in the region’s GDP (around 6% below trend) and a 1.3% increase in unemployment for the duration of the outbreak.

Hong Kong real estate realized a 33% decrease in transactions — likely as people were avoiding contact with one another — and an almost negligible deviation from home price trends. However, both metrics were corrected around three months after the declared containment of the outbreak, and by December the real estate market had rallied back to normal.

SARS, also being a coronavirus, infected far less people than COVID-19 (around 8,000 people in 29 countries), but the fatality rate was considerably higher (estimated at 14% - 15%), and measures to contain it went to great extents in regional areas. SARS gave way to some of the task forces and research used to combat COVID-19 today.

H1N1 Influenza A — Global, 2009

The Influenza outbreak of 2009 reached an estimated 60.8 million people in the United States, and many more worldwide, yet some things were quite different.

Medically, H1N1 was easier to treat and less deadly than SARS, and researchers were somewhat more prepared for it. There had been considerable talk about a major flu outbreak, and though H5N1 was a probable candidate, H1N1 ultimately became the culprit. Economically, the U.S. and global markets were recovering from a financial crisis, so the economy had considerably weakened, and some markets were already in decline, only to be worsened by the outbreak. This is perhaps the most important takeaway from our research.

Stewart Title Guaranty Company analyzed this pandemic’s impact on U.S. housing and job markets, and found that unemployment rose roughly 0.3% from Q2 2009 to Q3 2010, the duration of the outbreak. Again, it is important to note that unemployment was already past 9% due to the recent implosion of the housing bubble.

They also found a 3.5% decrease in home sales, which was almost negligible from the already ongoing recession, a 0.2% decrease in home sale prices, and an 88% decrease from an all-time record in commercial real estate sales. The latter, however, was attributed to an ongoing commercial real estate crash, caused by the lack of lending liquidity available for commercial purchases and refinances. After the outbreak, commercial real estate sales saw a steady recovery to pre-recession levels over the next six years.

Stewart concluded, “the pandemic or seismic event probably magnified or extended the trends of the time, but the total changes from the prior and the following year could not solely be attributed to the event.”

It is also for this reason that we did not include the Spanish Flu of 1918 in our discussion.  While the pandemic did cause factory closings and social disruptions, it is difficult to discern what portions of economic impact are attributable to the disease versus the more profound effects of World War I.

COVID-19 – Today

In 2013, Reuters quoted Dr. Dennis Carroll from USAID as he discussed the possible impacts of an upcoming pandemic: “The biggest driver of the economics of pandemics is not mortality or morbidity but risk aversion, as people change their behavior to reduce their chance of exposure.”

Risk aversion can strain the demand side as people reduce contact with affected industries (including theme parks, theaters, airlines and tourism), and the supply side as manufacturers decrease or halt production.  There is also an overall fear of recession, hurting the finance industry.

In early March, Bloomberg analyzed that over 1,500 of the Dow’s 8,300-point drop that month were attributed to Boeing’s losses, a company that was already under increased pressure due to its troubles with 737-Max aircraft. Other major losers were Goldman Sachs, Apple, UnitedHealth Group, and Walt Disney.

Real estate, however, has remained cautious, yet stable. The New York Times highlighted that while open house rules have changed, and showings have been limited, interest has piqued on second homes and short-term rentals outside bigger cities.

The lasting economic effect of COVID-19 will largely depend on how the pandemic evolves as countries react to it, and how this interacts with pre-existing economic risks.

This crisis is undeniably different, and there is no way to predict its results from the past. But what recent history can tell us is that real estate markets have not been historically weakened by outbreaks alone. If anything, outbreaks have catalyzed pre-existing conditions, and caused a temporary plunge.

For a market that had no clear trajectory before the crisis — a disappointing December jobs report, three interest rate cuts in 2019, a slowing economic growth rate, increasing concerns of a bubble forming in several sectors, domestic political uncertainty, a flare in the ongoing conflicts in the Middle East — many of the trends we see augmented during the crisis were present before. We had a struggling retail sector, a growing home meal delivery industry (powered by Whole Foods, Blue Apron, Fresh Direct), more streaming services and shrinking theater chains, and an increasing number of employees working remotely. These trends have been amplified by the pandemic.

Privately owned housing units completed had been steadily increasing since 2011, and commercial real estate showed stable rent and vacancy rates at the end of 2019.  Whether the lower interest rates will allow this growth to continue, or whether we have reached a peak in a business cycle remains yet to be determined.

Many are speculating that establishing remote operations may accelerate the current trend of working and studying from home once the virus has passed. An article in The Washington Post chronicled the massive migration from urban centers to remote home offices, and the rise of smaller towns. Joel Kotkin also wrote about this on The Coming Age of Dispersion (definitely worth a read).  Related to this, there may be increased demand for more amenities in apartment buildings as people spend more time at home.

Perhaps the one thing that everyone will agree is magnified by the crisis is uncertainty. But, as tight social distancing measures seem to be slowing the spread of infections, preventing hospitals from overcrowding, and lowering death rates (as reported by the NY Times), we wish for hope to magnify, as well.

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