Like many, for the last few weeks I’ve been trying to absorb as much information as possible about COVID-19 and it’s impacts to my industry. Here are some of the things I’ve uncovered as I have dived into the available information. Please don’t take any of this as a prediction of what is to come, I am not Nostradamus or an economist, or use it to make decisions about what you have to do protect yourself.
Starting with the question on everyone’s mind “What’s happening in the real estate market right now and where are things going?” Well the first is a little easier to answer, because there are some trends starting to appear in the data, but the second is much harder due to the ever changing governmental “Shelter in Place” restrictions we have. There are several areas we need to explore: housing supply & demand, lending, the history of 2008 Housing Crash and post pandemic effects on other real estate areas.
Before our current epidemic, 2020 was beginning to show signs of being a scary year for the buying community, as the # of listings going under contract was outpacing the # of houses coming on the market. This is a trend of course that would not have been sustainable, as prices would have had to rise sharply due to the lack of supply. In the last week though, we’ve began to see a divergence in the Active and Under Contract MLS Listings line occur.
This divergence of the Active and Under Contract listings could be representative of a few things, that I’ll have to speculate on since I can’t predict the future.
· It’s easier for a seller to list a property for sale than it is for a buyer to visit a property and decide to purchase.
· Unemployment, financial distress and a strong sellers-market (high prices), could have been a motivator to spur sellers to get into the market, along with the fear of the unknown impact.
· Short-term property rental began seeing significant cancellations or drop offs in new reservations a few weeks ago as the travel industry shuttered to a halt. This leaves owners the option to convert to full-time rentals, sell their properties or potentially carry them at a financial loss.
· Buyers may be exercising termination clauses in REPC due to Due Diligence, Financing or Natural Disaster clauses. Which would push the listing back into the Active pool.
It’s harder to understand demand, because you can’t physically count the # of buyers in the market, but we can look at the number of deals Going Under contract or Closing (Sold) as an indication. In the above graph the listings Under Contact line is increasing in a similar manner to what happened in Q1 2019, meaning people are or were buying. This could have been a carryover of the highly motivated buyers already in the market. The below graph though shows a divergence in trend between the # of Listings being classified as Sold vs those being Listed for Sale. It’s a preliminary view and maybe an indicator of a change in demand.
As a final graph for illustrating buyer demand, the below graph shows a spike in Listings being Reinstated in the last 2 weeks. Reinstatement could be due to a myriad of things, such as the field being populated more frequently, listings that had been temporarily removed for one reason or another, or listings failing to make it to the Settlement/Closing. If it’s the last reason, this would be an possible indication of Buyers exiting the market.
As you are probably aware, the Fed dropped rates on Mar 15th to Zero, and we saw rates drop on the 15yr conventional loan to ~2.5%, for well qualified buyers, for a few days. This unprecedented drop in the cost to borrow money, drove homeowners to bombard lenders with refinance requests.
To curb this demand, primary lenders started increasing rates to slow down the # of inbound requests. Today, the 15yr conventional loan sits around ~3.0%. In addition, the secondary lenders, these are the companies/banks that buy your loans from the person issuing it, began to demand a higher interest rate due to the uncertain economic times and foreshadowed uptick in unemployment.
Note: I’ve heard “they” are expecting rates to fall again in late Summer as we begin to understand the impacts of COVID-19 on the market and the risk of lending begins to fade.
2008 Housing Crash
Here is a brief review of the history of the 2008 Housing Crash, only because there are some other really good articles out there on it (see below). As of today, we are in a very different place with lending then in 2008. The biggest difference in the two markets: Lenders in the Financial Crisis of 2008 were going out of business and real estate financing had dried up. We haven’t experienced this yet and likely won’t.
Two additional differences from then to now:
· Real estate construction had been skyrocketing and there were lots of homes available. Today there is a shortage of homes available to purchase and very few locations to build large tracks of new homes. The graph below shows the historic demand leading up to and after the Crash. Notice before 2008 there had already been a decline in the “% Sold” line as new construction was entering the market. Where preceding our current drop in Q1, we had seen a steady # of listings and increasing “% Sold”.
· Predatory lending practices were also common practice that helped unqualified buyers purchase, when they could afford to own. This lending practice led to a high number of bankruptcies, foreclosures and short sales. After the crash, better laws and processes were put into place to protect borrowers.
Two great articles written about the Financial Crises and Housing Crash compared to today:
· This article in the NYTimes reviews the Crash of 2008 and investigates how today’s housing market could be affected. It does have an overall US view, where historically Utah tends to have a more stable economy. Utah has also been creating jobs and attracting companies. https://www.nytimes.com/2020/03/13/business/buying-a-home-coronavirus.html
· This article in Curbed further discusses the historically low inventory and the fact that plenty of people looking to purchase. https://www.curbed.com/2020/3/6/21163523/coronavirus-economic-impact-housing-market
Effects on Other Real Estate Markets
I found another very interesting article in SF Curbed that foreshadowed what real estate agents in Utah are beginning to experience when trying to List/Show houses. It also highlights some historical outcomes on real estate in other markets following a pandemic at the bottom of the article:
“There’s some history that suggests that hope for a rebound isn’t just wishful thinking. Svenja Gudell, chief economist for Zillow, examined pandemic histories ranging from the 1918 flu epidemic to the 2003 SARS outbreak and noted that economies “snapped back quickly once the epidemic was over.”
When Hong Kong, a hyper-lux market like the Bay Area, faced the threat of SARS, a disease that called for similar isolation practices we’re now facing, Gudell found that although transaction volume plummeted up to 72 percent, “house prices did not fall significantly”—nor did they fall in China during novel coronavirus spread there only a few months ago.”
As for what’s happening in the market, I think things are case by case or neighborhood by neighborhood. New listings are continuing to be added to the market while others are being removed. Some buyers are moving forward while others are pulling back. I believe we’ll probably continue to experience a “wintertime” market, where both sellers and buyers are holding off until nicer times. In this case, until COVID-19 has passed.
Salt Lake’s real estate market is still open for business, as real estate agents, lenders, appraisers and title companies are still allowed to operate. Even the county has employees set up to work remotely recording deeds. If you are selling a home remember this rule of thumb; If a property’s price matches its value it will likely sell quickly. If not, then the market will let you know.
Are you currently looking to buy a home? Here are two more graphs that show March’s new listings by zip code and then the year over year percentage change of listings in that zip code. These together could reflect a possibility of too many newly listed homes in a specific neighborhood.
Thanks for your time. If you’d like to talk or send me your thoughts, I can be reached via email @ firstname.lastname@example.org.