What has Been the Impact of COVID-19 on the Real Estate Market?

Welcome to 2020 with COVID-19, social distancing, self-imposed lockdown, and Zoom meetings. Rioting and protesting aside, I have to say that America has dealt with the lifestyle and work environment change quite well. But as life starts a trek back to a new state of normality, it will do us good to take a look at the real estate market and measure the impact of the Corona virus and how it will affect the market in the future.

COVID-19 Impact on the Mortgage Market

One of the positive results of this global pandemic is the affect it has had on the U.S. mortgage market. On March 15, the Federal Reserve lowered the prime rate to zero in response to the corona virus outbreak. This dropped 30-year mortgage rates to the floor – and we are happy to say that it stayed there. As of June 18, 2020, Freddie Mac reported in their Primary Mortgage Market Survey that 30-year fixed rate mortgages are averaging 3.13%. There are some lenders quoting rates as low as 2.75% for top-tier borrowers. This is the lowest rate in 30 years.

These low rates combined with easing of lockdown restrictions are going to drive a dramatic increase in purchase demand. In fact, activity is up over 20% from a year ago. “I think rate levels will be directly tied to the ability of the economy to recover. If it goes better than expected, rates would rise, and vice versa if things remain sluggish. Either way, the Fed is committed to keeping shorter-term rates lower for longer, and that will help to anchor longer-term rates like mortgages to some extent,” said Matthew Graham, chief operating officer at Mortgage News Daily.

What does this mean for borrowers?

Anyone who is in the position to purchase real estate should act now before the next corona virus wave hits. While mortgage rates may inch down a bit more, it will not be a significant shift, so there is no need to wait for rates to drop. On the other hand, if the economy recovers quicker than expected, we could see Feds bring the rates up a bit to slow demand.

COVID-19 Impact on Buyers and Sellers

These low loan rates are pushing buyers to risk virus exposure in search of better housing. This is good news for sellers who have suffered from a stagnate market during the first quarter of 2020. Compared with May of 2019, existing home sales were down 26.6%. This was the lowest level since July, 2010 and is part of a three-month decline in sales. Much of this drop can be attributed to peaks in the pandemic during March and April. The chief economist for the National Association of Realtors (NAR), Lawrence Yun, predicts that “Home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.”

During the height of the pandemic, new home construction ground to a halt. It is hoped that this will start to soon ramp up again to meet the rising housing demand. Without additional new homes coming into the market, home prices will rise too fast and quickly exceed affordability for first-time home buyers – even with the record-low mortgage rates.

Interestingly, the first wave of the pandemic has not lasted long enough to drive down sales prices and create a buyer’s market. The spring is a relatively slow period during a standard annual real estate season. The NAR reports that median sales prices in May increased 2.3% over last year establishing a median price of $284,600.

What does this mean for buyers?

Low mortgage rates mean you can get significantly more home for a much smaller payment. Now may be a good time to go shopping for a new home – especially before the predicted fall/winter second COVID-19 wave begins.

What does this mean for sellers?

We are not expecting price reductions at this time and experts are predicting an above-active summer of activity. Listings that feature virtual tours will have greater appeal to buyers who are nervous about virus exposure. Due to the increasing demand to work from home, home offices will have increased appeal. Families will appreciate private backyards and play areas rather than close proximity to public parks.

COVID-19 Impact on Investors

There has been less of an impact on the commercial real estate sector due to COVID-19. Cushman and Wakefield summed it up well when they said that “it’s premature to draw strong inferences about the virus’s impact on property markets. The commercial real estate sector is not the stock market. It’s slower moving and the leasing fundamentals don’t swing wildly from day to day.” While we are not seeing an impact on prices, rental rates, or investor returns at this point, there are areas that an investor may want to keep on the lookout.

JLL Capital Markets has recently released their COVID-19 Global Real Estate Implications report. As can be imagined, they stated that there will continue to be a high demand for medical office space, regional manufacturing facilities and associated logistics, along with storage space for companies with lean supply chains and low inventory cover. Office space offering a more flexible layout or private offices will have increased demand. If more businesses endorse a more permanent work-at-house outsourcing solution, there could be a period of office downsizing.

In a recent addition to the Immigration Policy, the new order will restrict J-1 (short-term exchange visas), L1 and H1 Visas. A reduction in international students, the ban on skilled workers and issuance of green-cards will pose short-term risk to the demand of housing created by these people.

What does this mean for investors?

With depressingly low government bond yields, real estate continues to offer good risk-adjusted returns in spite of any COVID-19 risk. JLL advises that based on the low interest rate environment; there is a good case for additional portfolio diversification.

Medical experts are saying that COVID-19 is going to be around for longer than we would like. Dealing with it is going to create a new normal, but the real estate market will survive. In spite of the health ramifications, experts in the real estate industry predict a strong recovery and stable prices.

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New England Market Outlook

The housing market across the country, and especially in Boston and New England, is experiencing a growth trend that’s accelerated over the last few years. The median home and condo prices in the U.S. have dramatically risen, reaching a record high in early 2019. Despite the continued appreciation, both real estate economists and the general public are starting to worry about the shadow of a second recession (the dramatic downturn of 2007 still on their minds). With this apprehension in mind, we’ll discuss some of the things to expect from the housing market in the second half of 2019, going into 2020.

 

The Housing Market Is Going Strong… for Now

The year 2019 started with a bang, and this wasn’t even news. Ever since 2012, home prices have been on the rise, reaching unprecedented numbers in some markets. The Greater Boston Area is a good example: in March 2019, the median price for single-family homes hit a record-breaking $377,000. According to the latest CoreLogic HPI Forecast released in May 2019, home prices have increased by 3.7% year over year from March 2018. This trend may continue into the next year with home prices expected to increase by 4.8% on a year-over-year basis from March 2019 to March 2020. Also, the Case Shiller Home Price Index in the United States reached an all-time high of 215.68 Index Points in April of 2019.

There are several other encouraging factors. One of them is the arrival of a new pool of homebuyers (the Millennial generation) on the housing market. Despite their reputation for refusing to settle down, Millennials⁠—compared to older generations⁠—account for the greatest share of primary home loan originations. This number should continue to increase as more and more members of this age group reach their prime home-buying years. Low interest rates continue to support strong demand, and experts anticipate these rates will remain low for the foreseeable future.

After estimating in late 2018 that 30-year mortgage rates could reach 5.1% for 2019, Freddie Mac revised this estimate down to 4.3% and projects it will remain low in 2020 at 4.5%. Finally, unemployment rates are minimal as well at 3.7% in June 2019, a minor increase from a 49-year low of 3.6% in the previous month.

 

Housing Market Growth May Be Slowing Down

The housing market is starting to show signs that the unbridled growth of the past few years may be coming to an end. This will be a relief for aspiring buyers burdened by dwindling inventory, high prices, and competition, particularly in hot markets like the Bay Area and Greater Boston.

The number of listings available on the market has progressively improved in recent months across the country, with unsold inventory reaching a 4.3-month supply at the current sale pace. This is an improvement from the 4.2 months of supply of the previous month, but still a long way shy of the six months’ supply required in a balanced market. Although house prices remain on the rise, they are increasing at a slower pace than they have in recent years.

This gradual upturn in the quantity of available housing does not necessarily mean that new buyers will find suitable housing wherever they want, as affordability remains a major concern in many markets. The San Francisco Bay Area, Seattle, Los Angeles, San Diego, and Boston are still out of reach for most buyers despite an increase in inventory and a reduced number of bidding wars. The rise in stock is not always due to the appearance of new listings, but also the result of properties sitting on the market. In New England, the increase in the number of listings—especially in the single-family home market—is barely keeping up with the demand boosted by favorable mortgage interest rates. The best-faring markets in this area are the ones that remain relatively affordable for most buyers, notably Rochester, NY.

 

Rising Prices and Diminishing Affordability

The real estate market is by nature cyclic and it is clear that the housing market will not maintain this pace in the long term. As a result, economists and homeowners are wondering how sustainable the current housing trend is, with numerous experts pointing to 2020 as the onset of the next recession.

In many cities across the country, housing prices are back to (if not above) their pre-2008 levels, and potential buyers are struggling to secure reasonably priced housing. This affordability issue is a key reason many industry stakeholders believe the real estate market is due for a correction, particularly in inflated markets.

It is unlikely that we will see a real estate crash comparable to the one we experienced a decade ago. Firstly, lending requirements (which were one of the critical factors of the 2008 financial crisis) are very different today. Also, the market’s key players are continually learning from past mistakes; banks now apply strict standards to select potential borrowers. Appraisers who reported feeling pressured by lending institutions in 2007 have been working towards establishing appraiser independence and higher education requirements to improve industry standards.

 

Should You Be Worried About the Housing Forecast?

Trends indicate that the market will slow down in the short term–to the relief of home buyers dealing with the listing shortage and high prices. However, the chances for a 2008-like real estate crisis are remote. If an economic crisis takes place, it will most likely be due to political and financial factors rather than the state of the housing market.

Where do you think we’re headed?

Please leave a comment with your thoughts and questions:

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If you’re involved in the mortgage business, you may be feeling the recent industry concern regarding the fall in mortgage volume. While volume has made some small rebounds in September, the overall trend is toward a decline with a year-over-year drop in volume of 18%, and 39% for refinances.

Interestingly, according to MortgageOrb, the refinance share of the mortgage market increased to 32%, up from 29% in July. What does that say? We can only speculate that it might mean purchase mortgages may be declining in volume faster than refinance loans (contrary to the prior YoY figure) and/or the September bump in volume was enough to increase REFI marketshare.

Why has refinance volume and purchase mortgage activity declined? There’s no simpler explanation than rising interest rates and the resulting decline in demand due to rising financing costs. According to Freddie Mac, rates are anticipated to rise to over 5% by year end. Other factors include limited housing inventories and bearish investment due to the rising cost of capital and advancement in the market growth cycle.

According to CNBC, the majority of homeowners in the US have existing loans with rates below 4%. Considering this, we can hypothesize that the still limited need for refinance is even less due do the high refinance rates of the recent past that have already served/saturated the majority share of the refinancing market.

This situation is further complicated by the fact that rising rates are deterring homeowners from pursuing refinancing to take cash out or finance renovations. Borrowers are turning to second mortgages and home equity lines of credit to get the funds they need and to avoid refinancing into a higher interest rate on the full balance of their first loans.

So what does all this mean for the mortgage business and the future of REFIs? These cycles are typical and this time around, it’s not likely to be as severe due to consumer protection legislation, such as the Dodd-Frank Act, passed since the Great Recession. Additionally, many of the volatile market conditions such as the excesses in subprime lending and availability of credit aren’t present today to the extreme and detrimental degree as in the period leading up to 2007.

We’ll likely experience continuing rate increases, interspersed with brief periods of cessation where rates decrease slightly and REFI volume makes a short-term rebound. Once the economy cools in the next few years, the FED will cut interest rates and we’ll experience new growth in mortgage lending, especially refinances.

If you’d like to talk with the team and I about what’s happening with the economy and local market, please give us a call or hit the chat button to the right. Btw, that’s not a chat-bot, it’s actually us.

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