Pandemic, what pandemic? Judging by the Pending Sales data out this week from the National Association of Realtors, one would be hard pressed to see any reason for concern about the economy. Instead of being a market filled with doubt and trepidation, NAR’s data tells the story of a very hot seller’s market. There’s really no other way to interpret the kind of rise in actively listed homes currently under contract. Sellers are dictating price and terms and if you’re a buyer, you just have to bite your tongue, jump in the water and be prepared to paddle like mad. This is one crazy real estate market.
To understand – or try to anyway – what’s happening, let’s start with why the market is red hot. Most people will tell you with interest rates at all time lows, the housing boom is being driven by a desire to lock in what is essentially, free money to buy a home. This makes total sense (Reach Out To Tim Here). Inflation is running at just under 2% and when you consider the mortgage interest tax deduction, the government is essentially paying you to borrow money to buy a house. Realtors will also point to the severe shortage of available inventory. If you are just a casual observer you may not have noticed, but I can tell you as a long time professional, as soon as a home comes on the market, it is sold and often with multiple offers. But don’t take my word for it, look at the data. NAR says there are 350,000 fewer homes for sale right now than there were one year ago. Further, that the available inventory based upon the current sales pace, will be absorbed within 4.5 months. NAR considers a balanced market not favoring buyer nor seller, a market when it will take 6 months to sell all the available homes. Naturally, anything longer than 6 months would therefore constitute a buyer’s market and in contrast less than 6 months a seller’s market. At 4.5 months available inventory, we are definitely in a seller’s market.
Okay, so we have very few homes available given record demand that is in part being driven by low borrowing costs. What else might be driving this incredible demand in the shadow of COVID-19? How about that the increase is being driven by a recognition that having a nice home to shelter in place during a pandemic is pretty important and even more so if you also need a good place to work from since many of us are working from home (Search For Homes Here). This means you need rooms and space – more rooms and space presumably – than you currently have. Perhaps you’re also running the First St. Family Room Elementary or the Corner Lot Dining Room Middle School, the Cul de Sac Kitchen Table High School or the ever the fun, Where The Heck In My Home University (also referred to as My Home U.), let alone its wildly popular Who’s Old Room Is It Anyway, Dormitory. Our homes have become the classroom, the playground and the office. It’s even the stay-cation destination everyone is taking their family to this summer.
Speaking of summer, with community pools and beaches closed, many people are searching for and buying homes with swimming pools like never before. Just try and find an available pool home or worse an available pool contractor to build one for you should you own a home without a pool (Visit Tim’s Facebook Here). It’s darn near impossible and certainly not for use in 2020 and probably not for summer 2021 either. And if that were not justification enough for a sizzling real estate market, there’s the whole “exodus” from the City to the Suburbs while trying to escape the virus. It begs the question, is this real? Sure seems like it…
As a 30 year veteran of the world of real estate, I can tell you that this past spring’s shut down pushed the traditionally hot spring real estate market into the summer season. So not only are we seeing an unusually hot summer real estate market, but we are also seeing the red hot spring market delayed into the summer, compounding an already imbalanced marketplace. This has magnified the intensity of finding a home.
What about sellers? Why aren’t there more sellers? Property owners aren’t selling unless they are trying to upgrade, take advantage of remote working opportunities by leaving the area all together or have concerns about the economy. The largest group of potential sellers, the seniors, are choosing to stay put. “Why would I want to sell now,” they ask? Why allow people/home shoppers into their home when it increases their likelihood of contracting the illness? And why go traipsing through a stranger’s home where they might expose themselves unnecessarily? Not to mention the whole, “Where would I go anyway” problem, when “There’s nothing on the market!” So not only is demand at a fever pitch, but supply is T I G H T, tight! Just to put final point on this, here are a couple stats I track from my local market of the Conejo Valley along the LA/Ventura County line. In February we had about 43% of all active listings under contract indicating a very, very strong market. However by May, following the government mandated shutdown, that number plummeted to 26%. Ouch. But then, suddenly the market rebounded! As of this week, our local inventory is down around 18% from June 1. This is in part because 50% of all active listings are under contract. Wowza! That is a serious turnaround and an indication we are in a serious seller’s market. What about the other 50% that are not sold you ask? Likely those homes are either in slower selling high end or those available homes are probably a little overpriced. Just because it’s a
seller’s market, it doesn’t mean sellers can ask for the moon, the sky and the stars, and get it. And by the way, while rates are at historic lows, this is only true for conforming and government backed financing. In other words historically low rates are available for conventional conforming or high balance conforming loans backed by Freddie Mac or Fannie Mae. If you want a jumbo loan, it’s a lot more challenging and even the major banks like B of A, Chase, Wells and Citi, who were the leaders in Jumbo financing, are reluctantly making jumbo loans. Even if you are a straight forward 20% down/80% or better loan to value borrower, you aren’t guaranteed you’ll successfully get a jumbo loan approved. In many cases you have to not only be well qualified but also have to have your deposit accounts with the banks loaning you the money. Even then they are not fast nor eager to make the loans. I just called 3 banks and 3 brokers/correspondent lenders yesterday inquiring about jumbo financing for a buyer with 5% of their own money and 20% from a parental gift and I found one lender who said they could offer a competitive rate. The others were, “Sorry can’t do it” though one told me could do it but only with a 5/1 or 7/1 ARM and the 7/1 was at 5%. Not exactly compelling.
Finally, I’d like to touch base about the economy and the concern that we are headed for a bumpy ride. There can be little doubt that the effect on the economy by the virus has not yet worked its way through the system. Aside from restaurants, entertainment, hospitality and leisure, many folks aren’t really feeling the negative financial impact of the virus just yet but I’m afraid this is going to change. The ripple effect of closing restaurants on their staff, the supply chain (think the delivery people, the farmers and ranchers, the food and alcohol wholesalers, the company that cleans the linens, etc.) and the closure’s effect on other area business, is going to be devastating. Presently there’s still a “hang on/hold on” attitude but sooner or later many of these businesses and entertainment venues, are going to have to let go and shut down completely. It’s already happening but will likely get a lot worse before it gets better. Real estate will not come out of this unscathed. Businesses without income will stop paying rent and shut down. Landlords no longer receiving rent and without prospects of replacement businesses, will default; defaulting mortgages means stress on banks and investors which in turn will lead to foreclosures and an increase in the distressed supply. Evictions of tenants who are unemployed will lead to greater shared living environments and unfortunately an increase in homelessness. This will complicate virus mitigation and could very likely lead to irrational political solutions that will muddle things further. All this portends to some dramatic changes in the coming months and years for the real estate market. However… given all the afore mentioned demand components coupled with the demographic shifts of the growing population of Millennials’ entering the home purchase market for the first time, I expect the bulk of the real estate losses to be largely mitigated. That’s not to say there won’t be pain and some softening of prices, rather that there should be enough buyers to absorb most of any potential increase in supply. I certainly expect that investors will be salivating at the prospect of buying distressed real estate again. Therefore, if you are a buyer, while there will be more homes available as a result of the economic impact of the pandemic, don’t expect a huge market shift into a crazy good buyer’s market. There’s a lot of forces at work that will keep values from repeating the epic collapse of 2008-2012 and the Great Recession. Therefore, when you find a good home, you should buy it. If you are a potential seller however, you probably want to think about accelerating your schedule and sell now while we are still in a full blown seller’s market. “Strike while the iron’s hot,” it is said. I can’t see any real benefit in waiting.