The Real Estate Conversation

I’ve received several notes, comments and emails on a couple recent post I put up regarding the state of the housing market.  Most people who wrote me sounded a lot the same: The market is going to go down!  Some said 30% and even one gentleman said 50%.  All who predicted the downfall of the housing market had one thing in common however, and that was that they were ready, waiting and that they were buyers.  So, is that what’s going on?

As I put in the heading, these are my thoughts, this week.  Next might be different so I am giving a heads up that like the Pandemic itself, opinions are subject to change.  OK, with that disclaimer out of the way the question is, do I agree with this gloomy assessment?  The short answer is no.  I recently pointed out in one thread that it took over 3 years following Lehman’s collapse for the market to hit a low of -30%.  Of course, this wasn’t every market either (Reach Out To Tim Here).  Some went further like Las Vegas and parts of Florida but others like West LA, maybe hit 20-25%.  My local community, the Conejo Valley and along the LA/Ventura County border, saw a drop around 30% at the lowest point.  Therefore it stands to reason that if the  market were to drop 30% it hardly seems logical that it would drop so much in less time than it took to do so during the Great Recession.

I want to make a couple of other observations here that I think are important.  First is demographics.  As I’ve been writing for more than half a decade, the Millennials are only now starting household formation.  Prior to the Pandemic, according to the National Association of Realtors, Millennials represented 42% of the home buying public.  Is that going to change? Yes, it is I’m afraid… it’s going to increase.  Remember, Millennials are the largest generation in US history – larger than the Baby Boomers, so yes, they will remain buyers and they will dominate the percentage of buyers in the market for years to come.

My second observation is that inventory is tight and as I’ve written at length, that condition is not going to change.  In fact, it may even get worse.  Follow me on this.  One of the reasons inventory was tight was the afore mentioned increase in the volume of qualified buyers.  Another is that seniors were choosing to age in place so unlike previous generations who would move once they got to 70, Baby Boomers and their elders of The  Greatest Generation, were not moving and instead modifying their homes to accommodate aging in place.  Now ask yourself this: In light of the current health crisis gripping assisted care facilities, would you say it is more or less likely that seniors are going to sell and move into these facilities?  Yeah, that’s what I think too: Not a chance.  In fact, if you want to find a new career, try mobile nursing or the less skill-required in-home caregiver.  The elderly are not moving unless they have no choice. This means fewer homes for sale and that means continued tight inventory for sale.

My third observation is not something that can be overstated.  There is a huge difference with the Pandemic Recession and the Great Recession and that is that housing and lending lead the Great Recession which is not the case now.  Bad loans, bad borrowers and a bad economy sapped all the equity people had and they found that not only were they out of work they were upside down on their mortgage.  With no reason to keep paying for a home worth a fraction of what they owed, short sales and foreclosures ensued.  Contrast that with the condition today.  Lenders due to Dodd-Frank, are better capitalized than ever before.  The stress testes they are had to endure over the past decade will prove to be one of the great saviors of our country and economy because the banks aren’t weak, they are strong (Search for Homes Here).  Coupled with the fact that prior to this self-created recession, Americans held the highest level of home equity on record.  So, no one is walking away from their worthless real estate, instead they are holding on or if need be, selling and reaping profits.  Selling may result in soft prices, perhaps a little lower if demand is insufficient to absorb this new inventory, but no one is handing over keys.  They will transact and they will have money in their pocket to carry them forward and most likely help them to buy something albeit perhaps smaller or more manageable.  Thus, any decline in value in that scenario is going to be mitigated by tight inventory.

Finally, there is the Federal Government and the Central bank, The Fed.  There’s an old saying on Wall Street, don’t bet against the Fed or don’t fight the Fed.  This is really important because unlike the collapse of Lehman where the Feds let Lehman fail only to trigger a market collapse and subsequent bailout of the “Too big to fail” companies, the Fed is not going to make the same mistake.  Barring the apocalypse scenario with The Corona Virus killing millions and us having no country to come back to, the government is going to support the banks so long as the banks support the borrowers.  No one wants a repeat of 2008-12 more than the banks except maybe the Fed.

There you have it.  While there may be some softness in prices in a semi near term having as much to do with the logistics of selling in a pandemic, I personally am only hearing rumblings of inventory shortages and buyers who want to buy.  I am hearing of multiple offers for home under $1M, increased inquiries and historically low rates.  Sure, this thing could get uglier really fast, but I think it’s too early to know that and until we see foreclosure notices go up en masse – and don’t forget there are currently Federal “no foreclosure” rules in place – I wouldn’t bet against the housing market forestalling a real estate crash.

I’d love to hear your thoughts so please share this post (Visit Tim’s Facebook Here) and let me have it!  Agree or disagree?

So a lender friend called me tonight.  He told me how he’s got amazing rates for Conforming loans and very good rates for High Balance Conforming loans but his Jumbo loans are gone.  Only a few big banks are doing Jumbo he said.  This of course is reminiscent of 2008 when the financial markets seized up and no one could get financing done except through a handful of big banks.  He also said all his investor clients are stock piling cash so they can pounce when the foreclosure market comes back.  “Hmmm…” said I.  To which my friend said, “What, you don’t think that’s what’s going to happen?”  “No” I said, “I do not.”

This is an interesting conversation that I thought I should delve into.  Of course, I am only speculating, and I could be just as wrong as anyone else; just as easily as I could be right (Reach out to Tim here).  If you’ve ever read my blogs before, you know I am never afraid to put my Carnac hat on and put my two cents worth of opinions out there.  Right or wrong, I’d like to hazard a guess as to what’s going to happen next.   So here goes.

I told my friend that I did not think we are going into a period of substantial foreclosures.  On the contrary, I believe the Federal Government is going to give mortgage and rent forgiveness.  In fact, the $2T stimulus passed last week even includes some rent and mortgage deferment opportunities.  Many states are already announcing freezes on evictions.  HUD has said much of the same on the government backed loans like FHA.  No one wants foreclosures and a repeat of 2008.  I am convinced that the Federal government is going backstop the banks having learned from the financial crisis.  I think the time will come when the Feds condition all the bank bailout monies on short term mortgage forbearance.  Let me explain my thinking.

What is the largest expense most American face every month?  Cars, student loans, credit cards, private schools?  No, it’s housing.  (Search for Homes Here)  Housing for families either in rent or mortgage and same for businesses in the form of commercial leases.  Whether that be in very expensive states like California or less expensive like Arkansas.  Whether that be homeowners, tenants or landlords, housing is the biggest monthly expense.  And let’s not forget, landlords.  Landlords mostly have mortgages too.  Big commercial landlords and mom and pops.  This is where the proverbial Covid 19 rubber hits the road.  As the pandemic goes from days to weeks to months, the economic toll will increase.  For the moment, the concern is keeping small business alive so it can come back.  But what happens when this goes on far longer than many are willing to say?  The cost goes up and the pittance the government is going to send most Americans will only cover food and utilities.  Rent and mortgage become the obvious pitfall.

So then, what is to happen?  I predict Washington will step in and not let anarchy prevail.  Something will need to be done and that something is mortgage and rent forbearance.  Why?  Supporting banks answer is the easiest thing for the government to do.  They have the Federal Reserve and the Treasury.  So, hear me out:  The best way to keep households and businesses solvent is to put a freeze on their largest expense.  This will mean however that the holders of those notes and servicers, will need compensation.  Again, this is where the Federal Reserve can play a part and support the banks and keep them whole.  Out of fairness, those property owners without mortgages will have to receive tax credits via the Treasury.

Mortgage and rent expense, is the key.  Put it on hold until the economy gets back on its footing and we can survive.  Allow foreclosures and you guarantee that banks and investors will strip the nation of its wealth, create a homeless crisis which in turn will lead to a health crisis and then we end up with that movie we’ve all seen and no one wants that.   Some counties are already moving in this direction by allowing time if you miss payments to repay and get current, and by preventing evictions.  What I’m talking about is on a national scale.

Let’s see how this plays out.  I personally feel this will go longer than most expect but that the fundamentals of the economy and real estate specifically can weather this storm.  And think about this: As we are all sequestering and sheltering in place, think about your home.  If you’re stuck in place for weeks or months on end, you better like your home and if you don’t or if you’ve been renting waiting to buy, you have to be thinking, “Get me out of here!”  Yes, as soon as this passes, people are going to want to buy.  Hopefully in a couple weeks the crisis shows signs of abating and more drastic measures won’t be required.  Let’s pray for that outcome but as we do, let’s also begin thinking about what happens next in  the event this drags on much longer than we hope.

Congratulations, you’ve just remarried and you’re thrilled. Did you know that 2nd marriages are on the decline in every demographic but one? Pew Research looked at remarriages in 1960 and compared them to 2013. What they found was surprising. Whether by death or divorce, in 1960 72% of men and woman between the age 18-34 and 35-54 remarried. In 2013 just 42% of 18-34 year old’s remarry while only 60% of 35-54 year old’s. But here’s the interesting part, in 1960 only 42% of people 55 and older remarried but fast forward to 2013 and that number jumps to 57%! More seniors are remarrying than ever.

And your point?”, you ask? Remarrying means you need to re-evaluate your real estate, will or trust, IRA or annuity. When you got remarried did you change how you hold title? If not and something happens to you, your new spouse might not inherit the house. Moreover, if you don’t re-evaluate how your other assets are to be divided amongst your kids, the assets could end up all going to your new spouse and maybe that’s just how you want it.

However, what happens when she passes? Your children could find they’ve been disinherited in favor of your spouse’s children and that may not be what you wanted. Even if you have a will or a trust, if you own an IRA’s or annuities you have to designate a beneficiary. If you don’t change the beneficiary after remarrying, whoever the original beneficiary is, gets it. That could be your Ex or it could your kids and not your new spouse. It could also still be your deceased spouse and then the IRA goes into probate.

In any event, if you remarry, take a moment. Review your assets in this new context and make sure what happens to your assets after your death is how you want it.

Don Newcome died yesterday. If you’re not a baseball officiando you may not have ever heard of him, but he was an important figure to baseball, the Dodgers, Los Angeles, and our country. You may wonder why a real estate blogger would take the time to write about a baseball player. Don Newcome’s story is the story of a changing America. The attitude of the country was shifting. The integration of baseball was the first step in popular culture towards equality, but when it came to housing, the year of Don Newcome’s arrival would prove to have negative ramifications that we still deal with today.

The year was 1949. Jackie Robinson had broken the “color barrier” of major league baseball just two years earlier. Baseball, America’s game, finally allowed people of color to join in. By 1949 there was still just a handful of black ballplayers, among them was the pitcher Don Newcome. Tall and powerful, Newcome was a man of firsts. He was the first African American pitcher to win a World Series game, the first to win 20 games and the first to win the league’s Most Valuable Player and Cy Young award for the year’s best pitcher in the same year. For the African American communities, seeing ballplayers like Robinson and Newcome excel was a great source of pride. Little did they know that at the same time, the Federal Government was conspiring to segregate America.

Segregation was nothing new in 1949. The landmark legislation of 1954, Brown vs. The Board of Education outlawing segregation in schools, was still 5 years away. Following World War II, where black soldiers fought and died with distinction, returning servicemen found little had changed back home. The South still lynched black men for looking at  white women, had white and colored only bathrooms, restaurants and hotels. But the South wasn’t the only place segregation and inequality existed. In fact, the Federal Government itself began a systematic push to restrict black homeownership. The 1949 Housing Act was designed under the guise of helping Americans buy homes by easing the ability to finance a home purchase. But it also gave the FHA tacit approval to rank neighborhoods for the purpose of restricting lending to white only neighborhoods and not just in the South. This happened in every city across America. Communities like Levittown in New York sold to whites only. This has been referred to as “White Flight” and lead to the creation of the modern American Suburb, the modern American white -only -suburb.

It’s hard to imagine today that a Government of the People and for the People would create a system that would specifically suppress a large segment of the people but that’s exactly what the 1949 Housing Act did. It allowed the FHA to create a color coded map which ranked geographic areas for lending, restricting which areas would be eligible for FHA insured loans. This served to restrict access to financing for many urban areas that had higher level of nonwhite residents. Today we call this Redlining and this phrase comes from the lines drawn around certain neighborhoods (check out local neighborhood sales here ). The effect of restricting the ability to finance meant, people of color couldn’t buy, couldn’t finance to make repairs and as a result neighborhoods rapidly deteriorated. The Act also had a provision that lead to the demolition of slums that supposedly was to spur building in declining neighborhoods but actually removed housing instead of creating it.

The impact of The Housing Act of 1949 is still felt today. As history has shown, people who own their homes have more wealth and pass that wealth to future generations. Since blacks weren’t allowed to buy, there was less wealth to pass and this is in large part why African American household wealth is so much lower today than that of the white population. Drop a stone in a lake and the ripples go all the way to the shore.

It is in this context that we look to a man like Don Newcome. He broke down barriers that would eventually culminate in the Civil Rights Act of 1964 and the Fair Housing Act of 1968. This is Don Newcome’s legacy and his contribution to this nation is invaluable. Want to chat about this article or real estate, just give me a call or send me an email.