First off, how are you? I hope you are staying healthy and safe through this Corona Winter. These uncertain times can be scary, but Pandemic doesn’t have to equal Panic.
I’m no scientist, so I don’t have the expertise to tell you to wash your hands, wear your gloves, wear your face-mask, stay inside and social isolate so we can get through this with limited impact on our collective health. You’re already being a responsible human and adhering to the CDC and WHO guidelines.
No, I can’t ease your stress about the health consequences of this virus… but, hopefully, I can ease your worries about the housing market, a subject I do have the expertise to speak on.
Mortgage Rates
Many people believe that mortgage rates follow the Fed Funds Rate, so were surprised to find that average 30 yr. Mortgage Rates actually increased when, in early March, the Fed dropped the fund rate to nearly 0%. In reality, Mortgage rates follow more closely with the 10 yr treasury rate.
Mark Fleming, Chief Economist at First American Economic Center, in his recent report explains:
“U.S. bonds, backed by the full faith and credit of the U.S. government, are widely considered the safest investments in the world. When global investors sense increased uncertainty, there is a ‘flight to safety’ in U.S. Treasury bonds, which causes their price to go up, and their yield to go down.”
The rise in mortgage rates in the early stages of the pandemic resulted from general uncertainty in the economy. Mortgage rates remained very low for those with high credit and stable jobs, but banks worried about the potential for some to pay back their mortgages. So for those with lower credit scores and less job security, mortgage rates rose.
Then came the $2T stimulus package, investors sold their stocks to purchase more secure 10-year treasury bonds and now mortgage rates are back down to historic lows. And, according to Bankrate’s Weekly Expert Poll, 0% of experts predict a rise in mortgage rates and 78% say rates will actually decrease even further, going forward.
Recession
While we haven’t been experiencing the current crisis long enough to fit the official definition of a recession, two consecutive quarters of GDP decrease, most economists agree that we are definitely heading in that direction.
When most of us think of recession, we think of the housing crash of 2006-2008 and the resulting “Great Recession”. As stocks go into free-fall and jobless claims break records, our minds naturally return to the economic fear of this time... But… This is NOT 2006. The last recession was directly caused by irresponsible lending practices. This recession is caused by a virus and during similar outbreaks, the stock market dropped while the housing market rose.
In fact, during three of the last five recessions, the housing market increased. In 1991 we saw a small dip, in 2006 a huge drop and during the other three, home prices increased substantially.
Then:
During the great recession of 2006-2008 the housing market spiraled out of control. Irresponsible lending practices granted sub-prime loans and encouraged refinance cash outs. This sparked a rise in foreclosures, which dragged down prices, which caused businesses to panic, which increased unemployment, which created further foreclosures, and on and on. Even those who were able to sell their homes had little to no equity and often wound up owing more than their home was worth.
Now:
The financial industry learned their lesson from the Great Recession. Banks have tightened lending policies on new and second mortgages. Now, homeowners have very low Payments as Percentage of Income (14.8%), compared to historical averages (21.2%), and have accrued a ton of equity in their homes. According to a March 11 report from eyeonhousing.org:
“the market value of all owner-occupied real estate totaled $25.9 trillion, growing by 5.3% from the start of the year, and outstanding home mortgage debt totaled $10.3 trillion.”
Policy makers learned their lesson as well. After the pandemic declaration by the WHO on March 11, congress passed a foreclosure and eviction moratorium. This measure combined with, low mortgage payments, and historically high equity in the housing market will provide a cushion to American homeowners, limiting foreclosures and propping up prices.
This is expected to be a short recession and the housing market will rebound quickly. In a February press release from Lawrence Yun, Chief Economist at the National Association of Realtors, he said:
“February’s pending sales figures show the housing market had been very healthy prior to the coronavirus-induced shutdown... Numbers in the coming weeks will show just how hard the housing market was hit, but I am optimistic that the upcoming stimulus package will lessen the economic damage and we may get a V-shaped robust recovery later in the year... Housing, just like most other industries, suffered from the coronavirus crisis, but once this predicament is behind us and the habit of social distancing is respected, I’m encouraged there will be continued home transactions though with more virtual tours, electronic signatures, and external home appraisals.”
Conclusion
Economic uncertainty is always a little scary, especially when combined with risks to our physical health. Many of my buyers and sellers are telling me to hold right now, and I’m honoring them and their decision, while continuing to communicate and keep them aware of what’s happening and what’s next. And some of my buyers and sellers are telling me they need to go right now and we’re doing that with all the appropriate safety protocols, smart marketing, virtual showings, and more (check back for more on this in days to come).
So, for those uncertain about their future right now, please take care of yourself and if you need a voice of reason, come back to the blog for updates, follow me on social media and reach out to me personally. I’ll try to ease your worries about the housing market, so you can focus on keeping you and your family safe and healthy.
And, for those ready to move, there’s never been less competition, interest rates are still historically low and I expect the housing market to BOOM when the pent-up demand starts returning to open houses. The time is now.