COVID 19 has decimated the stock market and collapse has just occurred before the economics has been felt in the broad economy here in the US. What is still to come?
So far the service industry is first beginning to feel the disappearance of customers. Food and drink establishments are hit with closure or devastating cuts in hours of operation and capacity. Last night in Palm Beach we went to a local fine restaurant on the condition of being able to eat outside. The very large patio was half filled and the inside dining was completely empty. Indeed the waitress thanked us for coming out to eat! And that was before a mandatory curfew in Palm Beach, which was just announced today.
We all know what is happening to the travel industry and the airlines are already talking about a needed bailout of 10's of billions of dollars.
So what about real estate - notably the residential real estate market?
Here in South Florida my law and title office saw two contracts fail during "as is" due diligence. I guessed that the buyer in each deal got "spooked" by the stock market crash and the uncertainty on easy transport to a vacation home in our paradise from other parts of the country. But we have 15 other residential transactions not being canceled. Why?
The two cancellations were both above $1 million in purchase price. One, in a country club community, was about $1.1 million. The other on the ocean in Palm Beach was around $5 million. The other 15 transactions currently on the board are all under $600,000. What this shows me is that there is a vast difference between discretionary home buying and required housing. Discretionary buyers are more likely to look for opportunities. Spending cash (as it was in both cases) can be put into an illiquid house or invested in a bottoming equity stock market. The house an be bought anytime. Blue Chip buying opportunities in the stock market are few and far between.
Another cause for cancellations can be fear of the unknown and we are certainly in an unknown area for the well being of our health and our economy. Discretionary dollars get hoarded by buyers in uncertain times. And typically those with more cash will pounce on opportunity when one presents itself - as now.
So I think likely, the demand for basic owner occupied primary homes is not going to see an meaningful softening. Perhaps the lower mortgage interest rate environment will also soften that blow. Let's call the price hurdle for these homes is about $1 million. Over this price we can expect buyers to be more selective and perhaps wait out the economic shakeout.
The unknown factor is will lower cost of borrowing push the more well healed buyers to both preserve their cash by getting a mortgage instead of using their cash hoard, and still spend the cash hoard on the speculative equity market? For this to happen there may need to be some backpedaling by Congress on reinstating interest deductions for mortgages over $750,000 and removing the cap on real estate tax deductions, for example.
The next few months will certainly be interesting to see how this plays out. In the meantime stay safe, stay healthy, and be germ smart!
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Copyright 2020 Richard P. Zaretsky
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., ZARETSKY LAW GROUP. ATTORNEYS AT LAW, 1615 FORUM PLACE, WEST PALM BEACH, FLORIDA 33401, PHONE 561-689-6660 RPZ@ZARETSKYLAW.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide www.ZARETSKYLAW.com. www.AUTOLANDTITLE.com
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