How the Coronavirus is affecting the housing market.

Life has changed for everyone as of March 2020, in the United States.

The effect of Covid-19 on the economy is immeasurable at this point.  From the cancellation of professional sports seasons to the closing of major theme parks, to the mandate of “no gatherings of 10 or more people” hitting restaurants and bars, there seems to be no industry that is unaffected.

The housing market is no exception.

Uncertainty is the biggest factor here, with buyers holding off because they’re wondering if there will be a market crash resulting in bargain basement prices, and sellers holding off because they’re worried about having too many visitors (which means too many germs) entering their home while it’s on the market.

Real estate agents are becoming skilled as effective health screening agents. Either open houses are being canceled altogether, or strict protocols have been put in place for distributing hand sanitizers and wiping off every surface with disinfectant.

As of a couple of weeks ago, the market was strong. New mortgage applications were up 25.9% in February, compared to to the same month last year; and new home sales rose approximately 8%, according to the Mortgage Bankers Association.

Then, with the news of the spreading coronavirus, the stock market took a hit in early March; and soon after, interest rates fell to an all time low, on March 5th at 3.29%.

This flooded the market with borrowers looking to refinance loans, so much so that some mortgage companies are considering shutting down their web sites just to stem the flow of applications coming in (not unlike Amazon shutting down their popular “pantry” to stem the flow of toilet paper orders).

It’s reflective of the times: unprecedented things are happening on a daily basis; and people are trying to rush to prepare.

During the second week of March, when treasury bond yields hit a record low, a qualified home buyer (if they were lucky enough to find a lender who could act quickly) could have locked in a rate of 3%. That could have been the case on Monday, March 9th.

By that Friday, the same borrower would have gotten a 4% rate on the same loan.  

Then, on March 15th, the Fed announced that it was cutting rates to near zero, in an attempt to ease the damaging effects the coronavirus has been having on the economy; however, this does not transfer immediately into lower interest rates, as some buyers believe.

The average mortgage rate for this year is still around 3.65% according to Freddie Mac. 

The sign of the times is rapid change, if nothing else.  But with all the chaos going on, can there be any way to predict what is coming next?  Is the only smart move, no move at all?

Well, there are some markets that have picked up somewhat. For example, even though housing sales have dropped off during this health crisis, the short term rental market in the suburbs has seen an increase in people that want to get out of a busy city during the pandemic.

However, in the bigger picture, both buyers and sellers are wondering… whether to buy or sell, and wondering: now or wait?

There’s no way to know for sure what the future holds. Joel Kan, who specializes in industry forecasting for the MBA, has said, “looking ahead, there is significant uncertainty regarding how the coronavirus epidemic will impact the housing market.”

However, predictions from the web site “Mortgage Reports” are optimistic that ultra low rates will return within the next few months. In fact, in a bold statement, they claim that history dictates that mortgage rates *should* be about 2.85% right now.  They claim there are only two reasons why they aren’t: first, lenders can’t handle the current volume of applications; and second, investors aren’t buying mortgages at the expected rate.

Normally, investors view low-rate mortgages as a safe place to put their money when the stock market tanks.

However, right now, there’s a fear that people will default on mortgages because job security is tenuous in the current environment.

One of the best scenarios to hope for is a combination of 3 things:

– Within 90 days, the crunch of refinancing applications will level out, so lenders will have no choice but to go back to lower rates.

– Since the Federal Reserve just committed to buying $200 billion worth of mortgage bonds, the demand for mortgage-backed securities will go up.

– And last but not least, if the US follows the same pattern as China, where there are currently no new cases of covid-19 in the province of Wuhan, where the virus started, then the crisis here could be over by the end of May.

As with any crisis – and with business in general – it is critical to use realistic caution without letting fear be the driving force.

Keep in mind that sensational headlines sell papers (or boost website traffic), so don’t be discouraged headlines that may seem ominous.

For example, one recent headline read, “Goldman Sachs forecasts the largest drop in
GDP in almost 100 years.”

Based on that headline alone, any business person or homeowner could easily become discouraged.

However, it’s only upon reading the full report that the entire picture is revealed… Goldman Sachs does predict the first *half* of the year will be tough; but they believe the economy will bounce back in the second half: in fact, they are looking to see 12% growth in the GDP in the third quarter, and another 10% in the final quarter of the year.

This prediction is supported by John Burns Consulting, based on their research involving pandemics:

“Historical analysis showed us that pandemics are usually V-shaped (sharp recessions that recover quickly enough to provide little damage to home prices), and some very cutting-edge search engine analysis by our Information Management team showed the current slowdown is playing out similarly thus far.”

Keeping things in perspective will help a great deal: As James Bullard pointed out recently in Bloomberg, “We are experiencing a ‘planned, organized partial shutdown of the U.S. economy in the second quarter.”

He goes on to say that he expects the third quarter to be transitional and the 4th to be robust.

There’s no question the year has started with unprecedented challenges; but there does seem to be light at the end of the housing tunnel, making its appearance, hopefully in time for summer.

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