Real Estate and COVID-19
COVID-19, the 100-year flu Pandemic, continues to severely impact our daily lives and economies around the Globe. Several clients and friends have asked about how it might affect the residential real estate market in months to come.
In this article, I will provide my best understanding of what is likely to occur in 2020 and 2021, based on the relevant factors and data. As you read it, be mindful that when it comes to COVID-19, we are dealing with many unknowns. What happens to different sectors of the economy will largely depend upon how well things are handled at various levels of our governments.
The emergence of COVID-19 and the Stay Home, Stay Healthy Order have dramatically impacted the economy and the real estate market in Washington. Unfortunately, we may be only in the early stage of the COVID-19 era and its impact on the real estate industry.
Here are some numbers.
- About 35,000,000 Americans have lost their jobs. This number is expected to rise even further. Our current unemployment rate is at just under fifteen percent. It is expected to get to around twenty percent in the coming months. When and what kind of jobs will these folks return to remains unknown.
- March 9th (7.79%) 12th (9.9%) and 16th (12.82%) were the three worst point drops for the Dow Jones in US history. The impact of so much value being wiped off within a week will be severe and long-lasting. These losses are also coupled with an inverted yield curve in the bond market. A prolonged recession is inevitable.
- The adverse impact of the combination of the above two factors is expected to be severe and long-lasting.
- An unusually high number of homeowners are entering forbearance arrangements (which only postpone the payments for a short period of time) with their lenders. According to one estimate, as of April 16, 2.94 million homeowners had entered into forbearance agreements. These loans account for 5.5% of the current total of 53 million active mortgages.
- It’s impossible to accurately assess how many of these will end up being short sales or foreclosures without knowing what these forbearance plans look like. By their very nature, forbearance agreement only delays mortgage payments for a short period of time. If one is unable to make regular mortgage payments, how can one be expected to make up the amount that was subject to forbearance?
- Due to the factors mentioned above, it is reasonable to expect a wave of short sales and foreclosures. This will hurt the real estate industry overall, however, will be good for those thinking about acquiring rentals.
Real Estate Stats for Washington State
According to the April 2020 report by the Northwest Multiple Listing Service (NWMLS), this is what has happened in Washington State:
- Area-wide inventory fell nearly 21% from a year ago, dropping from 12,955 listings to 10,282.
- A comparison of the 23 counties in the report shows only four counties with year-over-year increases (Jefferson at 0.9%, Whatcom at nearly 6%, Douglas at 13.8%, and Lewis at17.7%), while three counties had shrinkages of around 30% or more (King at -29.6%, Clallam at -32.9% and Island at -39.2%).
- The volume of new listings added during April was off by 34.7% compared to the same month a year ago.
These stats do not paint a good picture, at least in the near term. A constant flow of high-paying jobs that relied on special visas was a significant factor in keeping the Great Seattle market robust. The recent clampdown on immigration and issuing of Green cards is going to dampen that.
The impact of adverse economic conditions often takes several months to manifest itself in real estate. When you take a serious look at the numbers above, it is tough to paint a rosy picture for 2020-21.
You may have heard the old adage that all real estate is local. This will continue to hold true. If you purchased in a robust neighborhood and acted prudently (my clients know that I work hard to help them do just that) and did not pay too much, the impact you might feel will be minimal.
If you decide to sell within the next twelve to eighteen months, you might lose some of the recent gains, but that’s about it. Of course, when markets are tricky, it becomes crucial that you act prudently and have the right kind of help in your corner. If you are a buyer, you will need to be a prudent buyer, with excellent credit history and significant assets. You may find my book for home buyers very helpful in this nuanced market.
The Mortgage Money Availability
Of course, the availability of mortgage money is always a crucial element in how the real estate markets move. There is a great deal of uncertainty in that industry. The most significant factors in mortgage markets are first-time homebuyers. This group may not qualify under the new criteria.
At the end of March, a lender I work with said “Jumbo loans are wholly suspended. Renovation loans are entirely suspended. Loans from WSHFC are also wholly suspended. Specialty loans are now discontinued. Investors in the secondary market have completely stopped purchasing these loans due to market conditions.” There was some easing of lending later in April. Lenders can use different tools to tighten mortgage lending. In late April, most lenders had raised minimum FICO requirements to 680 for refinancing and 640 for purchase loans.
What can you do?
Some folks compare what is happening now with the collapse of financial markets in 2008. That is erroneous. At this time, the cause is not a single sector of the US economy. It is a Global Pandemic. We do not even fully understand it yet, leave alone get a handle on it. All projections indicate a long haul before it can also become manageable.
I lived through 1987 as an investment advisor. I saw the 2008 financial collapse as a mortgage banker, and now, I devote most of my time to the residential real estate market. I can say one thing with confidence. When there is a financial collapse, it hurts a lot of people, and it takes time to recover. The financial steps you take around such events have a long-lasting impact. You must become extra cautious, equip yourself with the right information, and enlist the help of those in whose expertise you feel confident.