A senior vice president at Real Capital Analytics says the drivers in the current economic downturn are different than the ones that spurred the global financial crisis more than a decade ago.

Jim Costello wrote in a post this week that “warning bells” were going off years before the housing market collapse in the last recession, but the downturn sparked by the COVID-19 pandemic “came on suddenly.”

“The variation in drivers could lead to a faster race to the bottom for market prices this cycle,” he wrote. 

“Until the medical issues are addressed, nobody knows how long the weakness in property income will last nor how bad the long-term damage will be,” Costello wrote. “Still, the magnitude of this downturn is becoming clearer given the pullback in market liquidity.”

A turning point in the global financial crisis was the 2008 collapse of Lehman Brothers, according to Costello. Five months later the market hit a low point for the unique number of buyers.

“The speed of the decline has been so intense this time  that the market is at nearly the same level for the unique number of buyers as seen at the worst parts of the GFC,” he wrote. “A drop in the size of the buyer pool that took nearly 20 months in the last cycle has been nearly achieved in 10 months in this downturn.”

In the COVID-19 downturn, the buyer pool is getting smaller more quickly, he wrote. The eventual floor for prices will be driven by the status of property income, investor perceptions and economic fundamentals, he wrote. 

“Some aspect of the shrinking buyer pool is undoubtedly a feature of the fact that acquisition professionals cannot get on planes to visit with brokers and tour properties,” according to the article. “Once travel and social distancing restrictions are lifted, some suppressed level of activity may rebound.”

But Costello also warned that when those buyers do hit the road once again, they probably won’t be as optimistic compared to a year ago.

“The speed of the pullback in liquidity is likely to help investors find a floor for prices faster this cycle,” he wrote.