It’s day 25 in quarantine. For me and my family the “stay at home” order here in downtown Nashville is in full effect.
Many of our favorite restaurants, coffee bars, etc. are preforming take out only and local state parks are now shut down. Over the weekend, we saw new city ordinances to limit grocery store capacity as well.
I’ve been somewhat silent up to this point among the frequency of real estate industry guess work by other agents and brokers online because I really think most are talking from a point of market certainty when things really (in all honesty) couldn’t be further from the truth.
Like any market forecasting, there is a certain amount of anticipation, like watching a ball roll down the stairs. You may think it will bounce all the way down, but it could stop its decent midway through. For that reason, I don’t want to offer certainty but prediction based on what we know so far backed by market facts.
I also want to preface this article by saying none of us (this includes real estate professionals) really know yet where the market is going; all we can do is watch how it behaves and continue observing to see how it will react.
I was taught the scientific method in middle school, it seems to be a good method to use during this crisis, by observing first and forming a hypothesis later.
The big Question. Will this be as bad as the financial crisis of 2008?
That is a loaded question and one that can’t be answered easily with a solid yes or no answer. My overall opinion starts with the duration the country is shutdown. Duration is key because the amount of time we are in quarantine will directly impact how long the effects of this downturn market could be respectively measured by each fiscal quarter.
Our spring market is gone. There’s little basis now for any recovery for our spring months with everyone staying at home. As of this week, housing wire.com reported, that 2% to up to 6% of active home listings have been taken off the market. For measure, Detroit and Philadelphia saw the biggest drop in home listings, both falling 63% from the same week in 2019, according to Redfin. Alternatively, listings in Denver fell only 1%.
During the week ending March 29, there were 58,366 new home listings, marking a 33% drop from the year prior. So that’s that. And it makes perfect sense. Homeowners don’t want to blemish their listing with higher days on market and with decrease activity, agents don’t want to be out in the field exposing themselves to the virus. However, some are and continue to take the highest measure of safety possible. My prayers go out to them.
What about our second quarter?
Our second quarter will be most likely the worst. Some agents are praising their current circle of clients–both buyers and sellers still buying and selling, and while that’s true, mortgage applications are still down 24%. In the past week, most of the activity being reported are leftover transactions from March. April remains to be seen.
So what’s our best case scenario?
Second quarter sees the biggest drop in consumer housing spending but suppressed demand carries us forward. We end up having a smaller dip in third quarter losses as mid-way through we start to see a sharp increase as much as 6-8% in total GDP, that’s assuming wages hold, and fourth quarter we see a continuing rise in demand. This effect (although many months into the future) are what many leading economic minds are hoping for–a deep sharp “V” in market volatility. A sharp fast decline followed by a sharp upswing in demand in a short period of months. Even if the US total GDP decreases by 10-15%, late third and four quarter demand could help make up the difference. (Again, try to think about how strong the economy was increasing going into the pandemic.)
Supply is still low and lenders still strong. Why is this important?
I cannot emphasize this enough. This is a huge navigating factor in the market rebound and why I believe this situation differs from 2008.
Many builders in Nashville building both residential and multi family are in an advantageous position to still reach their building goals so long as they can remain financially solvent. Many are taking advantage of the current Federal 2 Trillion Dollar Stimulus Package and applying for small business payroll grants to keep things moving. The National Association of Realtors is still projecting a strong finish in housing inventory by winter 2020. Not as strong as 2019 but still strong.
Right now, construction continues and real estate services remain essential in most states. This includes inspection and permitting. Bottom line, as long as builders can keep appropriating their construction draws, pay their subs on time and keep investors happy by completing their builds, we should still have the supply to match the leftover demand by fall and winter. Some building supplies and shipments are still worrisome as 30% of US building materials come from China, but we may see builders get creative. Keep in mind, there is still a lot of materials we produce domestically.
Does this mean if I wait to buy, I can get a low market deal on a property?
Don’t bet on it. As of now housing prices aren’t expected to drop 35 to 40% like they did in a 2008. At most experts are saying 10% nationally. Also, it’s worth noting buying a distressed property can take a long time to close especially if it’s pre foreclosure.
What about Nashville local economy?
Many tourism cities will be hit hard, there is no doubt. Nashville’s bedrock is entertainment and tourism. Add that with the privately owned hospitality sector like the number of commercial hotels and investor owned Airbnb VRBO’s and you’re looking at millions lost. This can’t be avoided, it is already happening.
However, Air-bnb and others are helping owners and investors with stimulus packages cash payments as a way to slow the bleeding. As the market sits and slowly comes back, many of these assets will get off-loaded and sold. Some at a big discount because of the premium price many investors paid on the front end. In the coming months, Nashville may see many investors in Short Term Rental Properties repurposing their homes for long term rentals instead.
It’s worth noting, higher priced homes and second home markets are the first to soften in a recession.
Investors, like second home buyers and retirees will hold to wait and see what the market does but the demand will come back even in hard hit locations like beach communities in South Carolina and Florida
What’s about the lenders? Will there be defaults and foreclosures?
Sadly, this is a difficult subject to discuss and also the most volatile sector of the housing market to predict. Short answer…Yes there will be. How much right now is unknown.
It depends on a couple of different factors. First, the amount of mortgage securities the government is actually willing to step in and buy back, which it looks like now is quite a bit.
The average U.S. rate for a 30-year fixed mortgage fell to 3.33% last week, according to Freddie Mac, as the Federal Reserve’s bond-buying program created demand for securities backed by home loans.
Together with the prior week’s drop, it was the largest two-week decline since December 2008 when the Fed shocked the financial world with its first-ever round of buying mortgage-backed securities. Back then, the Fed announced $600 billion in purchases of MBS. This time, the Fed said in a March 23 statement its budget was “unlimited.” The Fed revived its bond-buying program on March 15 in an attempt to grease the wheels of the lending markets and prevent the type of credit crunch that devastated the mortgage industry more than a decade ago. This week’s 17 basis point drop in the average 30-year fixed rate indicates it’s working.
“That drop reflects improvements in market liquidity and sentiment,” said Sam Khater, Freddie Mac’s chief economist.
In March, the initial response among lenders to the financial uncertainty caused by the COVID-19 pandemic was to boost rates even as the benchmark yield on Treasuries fell – adding a buffer known in the industry as a risk premium. This risk premium is important as its increased margin protects lenders from lower interest rates set by the FED.
Second, loosing appraisal restrictions for FHA loans–involving Freddie Mac and Fannie Mae. VA loans are also following suit.
The FHA and VA both announced late Friday that would allow for appraisal and income verification alternatives as appraising homes and verifying employment are more difficult right now than they were just a few weeks ago.
On the appraisal front, the FHA and VA will allow exterior-only appraisals (known as drive-by appraisals) or in some cases, desktop appraisals, where the appraiser doesn’t inspect the property or comparable sales. Instead, the appraiser relies on public records, multiple listing service information, and other third-party data sources to identify the property characteristics.
March 30, 2020, 5:48 pm By Ben Lane | Housingwire.com
With many US residents working from home, FHA standards are also changing with employment verification by allowing the following alternatives to reverify a borrowers employment record.
- Year -to-date pay sub or direct electronic verification of income dated immediately prior to the note date.
- Bank statement showing a direct deposit from the borrowers employer for the pay period that immediately precedes the settlement date
But even with relaxing standards, are mortgage lenders relaxing their own? As of today, no they aren’t.
Lenders number one concern is borrower default. Even with some relaxed standards from the FHA and VA, lenders are adding their own overlays to the origination lending process for extra security by tightening the age of document requirements from 4 months to 2 months. They are also requiring verbal verification of employment. They are also accepting an email sent from a employers work address, year to date pay stubs from the pay period that immediately precedes the note date or an asset account statement evidencing the payroll deposit from the pay-period that immediately precedes the note date. Each mortgage company is different, so if you do own a home or thinking of buying one, it might best best to check with your mortgage company/lender on their current requirements.
The big risk.
Sadly even with lenders offering moratoriums on mortgage payments, some people will still be out of work and will be in danger of loosing their homes. Lenders are increasingly growing more worried with the growth of unemployment filings as well as the lax response requirements for forbearances from the US government. It is worthy to note back in 2008, there were many requirements needed like hardship letters, loss of income/employment, etc. to qualify for a forbearance. Many lenders feel that this decrease standard to allow anyone to participate without any penalty could be devastating to to our lending institution. But there could be a way to create other loan packages that could be added on: for example, as a second mortgage at a low interest rate could offer a chance for lending institutions to recover. The ultimate goal in my opinion would be to move the “missed” payments to the back of the loan for a small interest increase to make up for the loss. Many car loan servicers like Honda and Toyota are already doing this.
But I don’t want to generalize this. I am not a lender. It’s a situation (if and when it gets to that point) every loan will have to be analyzed and evaluated on a case by case basis. There are so many factors…credit, amount equity in the property, etc.
My Outlook (as of today)
My opinion is Nashville (unlike 10 years ago) will be much more vulnerable that is was in 2008 because of the sharp inflation in housing costs and the stagnation of equal income and wages (especially in the urban core.) That’s just a fact. The cost of living here has skyrocketed. The average entry level employee to even buy 1 bedroom downtown cant currently by done for less than $220-$250K. Most wouldn’t qualify for more than $160k at best. Nashville’s biggest need moving forward is attainable housing.
With all factors on the table, the best we can do is continue to watch the market and the lending framework across the country and how it applies to our local market.
I can’t emphasize enough…ALL OF THIS CHANGES DAILY.
Many real estate professionals across social media right now will preach (with some certainty) where the housing market is and where it is going, when in reality, I (nor they) really know.
My forecast as of today for the 2020 market is…watch and wait.
Again, right now the health of the housing market and the US economy boils down to the amount of time we are all behind closed doors. The economy is like a big engine and eventually we will have to start it up again. Until then, stay safe and healthy. Let’s all do our part to flatten the curve and kick the crap out of Covid-19!
Stay well Nashville!
Austin Adams | Amerikey Realty Blog (4/6/20)