Sarah Jarvis Team at One South Realty

at One South Realty

Mortgage Lending

The Coming ‘Wave’ of Foreclosure

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I am beginning to hear a lot of chatter about foreclosure right now. 

Spoiler alert –– don’t worry.

One of Biden’s first acts as President was to extend protection to homeowners experiencing hardship due to COVD

As we transition from one administration to the next, we are beginning to see where this administration stands on many issues –– and being someone who makes a living in real estate, Biden’s housing-related policies are of particular interest.

Unsurprisingly, in one of his first acts as President, Biden extended both COVID-related forbearance protection and the foreclosure moratorium in an attempt to keep those who lost jobs from being unceremoniously tossed out into the street for non-payment of their mortgage.

The System Shock

When COVID hit and we went into lockdown, it cost a lot of people their jobs.

For a slew of others, COVID may not have cost them their jobs, but their pay decreased sharply when their industries were decimated.

The spike in initial jobless claims (March 2020) still blows me away in its severity

When you have that many people become unemployed (or underemployed) as rapidly we did (see the unreal spike in the chart above), everything is impacted –– and housing was, of course, not spared. 

In the period immediately following the lockdowns, people started to make tough decisions about how to allocate their savings into an extremely uncertain future –– and not making a house payment became a choice many had to make.

Enter ‘forbearance.’

Forbearance

COVID has forced us to learn so many new terms –– ‘flatten the curve,’ ‘herd immunity,’ ‘mRNA,’ and ‘contact tracing’ to name a few. ‘Forbearance’ is yet another one and now at the front and center of COVID housing news.

Without getting too deep in the weeds, mortgage forbearance is basically the ability for a homeowner to (legally) stop making payments to the mortgage servicer for a period of time without fear of losing the home in foreclosure. 

Forbearance does not absolve the borrower of the debt, it just basically says ‘We both know that I can’t pay you right now because of COVID, but I will start paying you again when I have a job and we will work out how to make up the payments I missed.’

Right now, those who report the news are acting as if the two are one and the same.

It is as unfortunate as it is uninformed.

Foreclosure (vs. Forbearance)

While the words sound similar, they mean different things in the same way that ‘lose your house’ means something way different than ‘mortgage relief.’

Forbearance is temporary relief in making your mortgage payment –– foreclosure is the legal process that a lender must go through in order to seize your home for non-payment of your mortgage. 

When you are (legally) in forbearance, you don’t have to pay the bank, but you cannot have your home taken through foreclosure. If you stop making your mortgage payments but are not protected by some type of forbearance agreement, then the bank can take the home from you.

Note –– forbearance does not mean the same thing as mortgage delinquency or pre-foreclosure. Just because a borrower is in forbearance does not mean foreclosure is immenent.

Asset–Based Lending

2008 notwithstanding, lending money against an asset like housing is one of the safest forms of lending imaginable.

Why?

Borrowers tend to pay their mortgage above all other types of debts (credit cards, medical bills, student loans, boats and other do-dads, or other non-essential expenses) because being homeless sucks and foreclosure eviscerates your credit.

Thus, banks love to loan money against REAL assets –– and a house is a real asset (think REAL estate.)

Besides the fact that borrowers tend to make mortgage payments come hell or high water, there is an asset securing the loan:

  • If I, as a bank, extend you credit to buy a home and you don’t pay me, I can take your home and resell it to get my money back.
  • If I, as a bank, extend you credit to pay household expenses or Netflix (i.e. –– a credit card) and you don’t pay me, I can’t really take the food you have eaten or the movies you have watched and sell them to get my money back. 

And thus the reason that loans secured by assets are at lower rates than loads not secured by assets.

Appreciation = Protection

So not only are houses real assets –– houses tend to appreciate in value.

Yes, 2008 showed us that houses don’t ALWAYS go up in value, but for the large majority of history (including every year for the past 10 years,) housing values have marched forward in a stable, if not spectacular, manner.

The equity created by the simultaneous reduction of debt and appreciation in the price creates additional value in the home –– and that is critical to understanding the real risk to the market we are in.

Forbearance is Up, Foreclosure Will Not Be

Right now, the message being delivered by news and media outlets is forbearances are up sharply (which is true) and that the moratorium on foreclosure has been extended by presidential decree (which is also true) –– which, for the person who doesn’t follow the market in great detail, sounds ominous. 

It shouldn’t.

Foreclosures happen when TWO conditions occur:

  1. the owner cannot make the mortgage payment AND
  2. the house is worth less than the debt

Without both, foreclosure is unlikely.

If the debt owed > home value, the homeowner will have to write a check to the bank for the difference between the debt and the sales price when they sell it.

If the debt owed < home value, the homeowner will collect a check for the difference between the debt and the sales price when they sell it.

That is a massive difference.

Using real numbers:

  • if a home is worth $400,000 and the debt is $500,000, then the owner is incentivized to allow foreclosure and stick the bank with $100,000 loss
  • if a home is worth $400,000 and the debt on the home is $300,000, then the owner is incentivized to sell the home and pocket the $100,000

It is all about incentives. 

Homeowner Equity

So if foreclosure happens when the home is worth less than the debt, where do we stand right now?

From the Urban Institute (urban.org)

Using the chart above, when the yellow line falls below the blue line (negative equity), people are far more likely to get foreclosed on. When the yellow line is above the blue line, then the owner will sell the home and pay off the mortgage.

Right now, there has never been more collective equity in the US home market.

Do you really think foreclosure is going to be an issue?

Summary

I get it, we are still paying for the debacle that was 2008. The public sentiment is that when prices rise fast, bad things are about to happen. People remember the pain, but they don’t understand the reasons.

2008 was bad for sure, but the conditions that created the housing crisis of 2008 DO NOT EXIST TODAY.

Depending on whose research you want to believe, the current available housing under-supply is as severe as the housing over-supply was in 2008-2010.

Does that put it in perspective?

In our last blog, we wrote about how pricing was not likely to head down anytime soon, and (good news) foreclosures tend to move inversely with home price appreciation.

Right now, the lack of housing is pushing pricing higher as rapidly as in any other time in history and as equity increases, delinquent homeowners sell in lieu of electing foreclosure –– and this condition is unlikely to change in any meaningful way for the foreseeable future.

Articles such as this disingenuously deceive the reader in an attempt to garner clicks.

Yes, events that are not easily predicted can bring rapid changes to any market –– and will always be a threat –– but the threat to today’s housing market is not too many foreclosures. 

Will there be a few additional owners who end up losing their homes when forbearance ends? Yeah, perhaps. But you won’t notice.

Don’t let those who are uninformed frighten you about some coming wave of foreclosures.

They are –– in a word –– wrong. 

An Appraisal is Not Fair Market Value

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Definition: Fair Market Value (FMV):

  1. A selling price for an item to which a buyer and seller can agree.
  2. The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.
  3. The price that property would sell for on the open market.

I once had a professor tell me that Fair Market Value was the price at which both sides felt like they got screwed (I loved that one!) but I will let the more formal definitions rule the day.

Fair Market Value is basically the price at which two willing parties can agree upon to exchange an asset. 

Ok Then, What is an Appraisal?

In real estate, an appraisal is a 3rd party analysis of a property’s value based on recent sales of comparable (similar) properties –– but that does not necessarily mean it represents fair market value.

The appraisal is nothing more than a (supposedly) qualified and (hopefully) impartial individual offering their opinion of the value of the home. The appraiser is hired by the lender (well, you actually pay for it even though the bank requires it) and is used to set the value upon which the loan amount will be based –– provided it is equal to or less than the purchase price.

So if you are getting a loan for, say, 80% of the value of the home, the bank will loan you 80% of what is either the price on the contract or the appraised value –– whichever one is lower. 

And to answer the question –– Yes, an appraisal is mandatory if you are getting any type of conventional loan to finance your property.

How Does an Appraiser Arrive at the Valuation?

Typically for residential purchases, appraisers employ the ‘Comparable Sales’ method. The Comparable Sales method uses 3 recent closed sales of similar properties –– makes adjustments for any differences –– and then computes a value. 

While there are other appraisal methods for income-producing property (the ‘Income Approach’) and unique properties where similar sales are few and far between (the ‘Replacement/Cost Approach’), the comparable sales approach is used in a large majority of cases when residential property is purchased. 

Rapidly Changing Conditions

For a moment, imagine the value of something OTHER than real estate.

What do you think the last Super Bowl ticket is worth? The $200 it says on the ticket or the $3,500 you can get for it on StubHub? And what do you think that ticket is worth on the day AFTER the Super Bowl? Not much …

And what do you think a bottle of water is worth in the middle of the Sahara? The $1.59 you paid at 7-11 or closer to $1,590 the person with the empty canteen just offered you?

You get the picture.

The point is that market values are fluid and constantly in flux depending on any number of reasons. And thus, as market conditions change, so does market value.

And trust me when I say this, this market is one of the most fluid markets in the history of real estate.

The Issue Now With Appraisals

As we like to say at One South, using past sales to predict future values is a bit like driving your car while looking out the rear view mirror. It will tell you where you’ve been, but not necessarily where you are going. 

This is especially true in the current environment. 

In a market where 10-15 offers is not uncommon and inventory levels are the lowest in history, past sales are always going to yield a value lower than where the market is trading.

Simple economics states that when demand exceeds supply, prices rise (and the converse) –– and when the number of buyers exceeds the number of sellers by as much as it currently does, it only makes the difference between the appraised value and the sales price that much larger. 

It’s frustrating that one of the most integral parts of the home buying process is so disconnected from actual values.  

The Mistake Buyers Make

The ‘Missed Appraisal’ (one where the appraised value is lower than the contract price) is extremely common right now –– especially when multiple offers are involved.

So for many buyers, the jubilation (and relief) of winning a competitive offer situation quickly turns to doubt when the appraised value is less than the price they paid. In effect, buyers allow a third party valuation opinion based on events in the past to cast doubt upon a decision made on current market inputs. 

Don’t.

Why?

Because the Appraisal is not Fair Market Value!!!

Yes, appraisals set the loan amount and when the appraisal comes in low the buyer needs to make up the difference in cash –– but remember, appraisals are really about the financing and not FMV!

I cannot overstate this enough –– the fair market value of the home and the appraised value are not the same thing. 

Things to Note About Appraisals

A few things to remember about the appraisal:

  • Appraisers never go through the houses they use as comps
  • Appraisers never talk to the purchaser, seller, lender, or (rarely) Realtors about the price
  • Appraisers cannot use PENDING sales in their analysis
  • Appraisers never visit the houses you didn’t purchase
  • Appraisers (typically) don’t how many offers were made on a house

I am not throwing appraisers under the bus, only pointing out the differences between purchasing a house and appraising one –– as well as the different set of rules appraisers must follow.

The bottom line is that no one knows as much about the decision as you do. 

Appraisers Are People

If you really want to have some fun, pick any home and take a look at the value that Zillow, Trulia, Realtor.com, Movoto, Realist, and/or the tax assessment assigned to it. I guarantee that each one is different –– sometimes shockingly so. 

Appraisers are no different. 

In the same way that Zillow (et al.) have different algorithms, so do people. Yes, the form that appraisers use is the same, but the comps they choose and the adjustment they make are subjective.

If you assigned 5 different appraisers to value the same home, odds are each one will arrive at a different value. 

It’s unfortunate, but it’s true.

Summary

Remember, appraisals, while important, are not gospel. They are just someone else’s opinion of value of a unique asset who did not see the other homes you did, who does not have your motivations, and who does not have your likes and dislikes. 

Your opinion of your decision is what matters –– not the appraiser’s. 

When markets are moving as quickly as this one is, don’t worry about the appraisal as it relates to the VALUE of the home you are buying. If you have done your homework and have made the best decision for your situation, then the appraisal is not what matters in the long run.

Trust your own gut and don’t sweat the appraisal.

The Best Time to Build a House –– EVER!

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The world is weird right now –– no one will argue that.

The world is also quite uncertain now, too –– and I don’t think you will get an argument there, either. 

But that said, there has never been a better time to build a house –– and I will gladly engage in an argument as to why that is true.

Disclaimer

Now, when I say it is a great time to build, I am talking about the market, and not necessarily about the individual. 

If you are on an uncertain financial footing, then, no, it might not be a great time to build. Those whose industries are in the midst of a major reset or have exposure to a resurgence of COVID, then any long(er) term plans should probably be put on hold and liquid assets hoarded.

But for those whose financial positions are solid, there has not been a better opportunity to build a home in the last 50 years, if not longer.

Inventory 

Let’s begin with housing inventory.

Simply put, inventory was at record lows headed into COVID –– and COVID only exacerbated the problem.  

In the latter part of February and early March, inventory locally (and nationally) hit all-time lows. To give you a sense of the level of low, look at the chart below. 

The chart below shows inventory by MONTH

The chart below shows inventory by UNIT COUNT

Some submarkets had roughly 1 month of inventory, with most still operating with as little as 3. (For context, a market is considered balanced when it has 6 to 8 months of inventory.)

Each year that we have distanced ourselves from 2008, inventory has become increasingly more rare –– and 2020 was shaping up to be even lower than a record-low 2019.

Now, instead of the normal increase in resale inventory that typically appears for the spring market, COVID caused many homeowners to wait and NOT bring their properties to market.

NOT HELPFUL, COVID!

The traditional ‘March to May’ bump in available homes never materialized this year, and thus, the market has even fewer choices than last year’s ridiculous record low.

Perhaps the decision to sell will come later, but for now, the houses that we need to satisfy even a somewhat tempered spring demand are simply not there. 

The spring of 2021 will be absolute insanity.

Production and Housing Starts

So pretend for a moment you are a banker –– what is the first thing you do when the economy goes sideways? 

You stop lending, of course.

Credit contraction is the first reaction to economic upheaval and the one thing that the Fed and Treasury need to combat in order to minimize the impact of any financial crisis. 

So if you are a bank, are you going to encourage new home construction when you really have no idea how COVID will play out? Of course not. 

And therein lies the rub …

The homes that are currently under construction are almost all a result of contracts written last fall and this spring prior to COVID. 

In our market, roughly 50% of the homes built in any given year are ‘speculatively’ built (in other words, the home is started without a contract in hand in ‘speculation‘ that a buyer will emerge prior to completion.)

Housing starts had just started to recover to historically normal levels (see the chart above) in an attempt to make up for the decade long deficit in new home production –– oh well, so much for building the number of homes we need to.

So just to make sure you realize –– the market for new homes had been undersupplied for close to a decade AND the normal number of new homes that would have been speculatively built to try to handle the demand are not going to be started!

Uh-oh.

The lack of speculative building will manifest itself in the spring of 2021 and will mean a greatly reduced pool of new homes to choose from. With inventory levels already stressed, the lack of new homes will make homeownership even more challenging.

Preference Shift

One of the more interesting patterns to emerge from COVID is the population exodus from the large east coast metropolitan areas to smaller cities and/or suburbia.

Click the image to read the article.

COVID punishes density and places like NYC are already seeing a population electing to flee vertical properties, public transportation, and high cost of living for some grass, the (perceived) safety of their own car, and overall affordability.

Besides the safety aspect, Zoom and other virtual meeting platforms have proven that expensive office space and cumbersome travel is not as necessary as we thought to connect with clients.

Furthermore, the leading wave of the Millennial home-buying generation was already poised to begin the transition out of the cramped 1 bedroom apartment anyway –– COVID is simply accelerating the emergence of the trend.

This demographic shift will not be felt as acutely as some of the others discussed here, but over the longer haul, it will impact the need for more new construction and alter the distribution of population along the eastern seaboard.

Material Costs

So guess what COVID did to global demand? It basically killed it.

As much damage as COVID has done to the US economy, it pales in comparison to what happened (and is still happening) in China, Russia, much of Europe, and the Middle East.

Click the image to read the article.

In the latter part of 2019, much of the world was already arguably in a recession, and the onset of COVID has devastated what was already a weak global economy.

We’ve all heard about COVID’s impact on oil markets (literally negative pricing), but the cost of the other commodities has also plummeted. Metal (steel, iron, aluminum, copper), wood products, and other essential commodities are all down sharply due to lack of demand and will likely stay down as global demand abates.

So the good news here is that the cost of building a house has actually come DOWN for the first time in decades –– and that spells opportunity for those in position to take advantage of it.

Fear

Just so you realize, the largest one month drop in the Builder Confidence Index happened in April. 

Housing Market Index

BCI is now on par with the years immediately following both the Financial Crisis of 2008 and the 1987 Crash.

New construction sales have slowed precipitously, and the majority of the work in residential construction is the work that was contracted during the 2019 fall and early 2020 spring. 

So while I don’t think I would call builders desperate, I would call many of them concerned, and the opportunity to secure a good price is far greater now than it was even a few months ago. 

As Warren Buffet is so fond of saying, ‘When others are cautious, be bold.’

Interest Rates

And of course, there is the interest rate.

Whenever financial interruptions occur, the first thing the Federal Reserve and/or Treasury do is to relax monetary policy. In other words –– they make borrowing money cheaper.

Why? Because cheap money (typically) encourages economic activity. 

In the same way that the cost of oil is in everything, so is the cost of money –– and when borrowing is cheap, it makes a lot of sense to borrow for long term purchases. 

If you are going to borrow money, now is a phenomenal time to do so.

No Bidding Wars

So the cute little renovated bungalow you have been waiting for just showed up in MLS and showings start Sunday. You ping your agent and several texts later you are set to see the property at noon on the first day.

Buying today can feel like an auction

When you show up, you find out that you are one of 20 showings that day and the seller already has 3 offers in hand (2 are over the asking price,) and they are expecting another 5 more.

Ugggg.

Just so you realize, the scenario I just described is not as uncommon as you would think –– it is due simply to the lack of inventory.

So in order to be the winning offer, a purchaser will need to waive the inspection contingency, the appraisal contingency, and put down as much cash down as possible. And did I mention that you will probably also have to offer more than the asking price?

For many, that is next to impossible.

Now, imagine a scenario where you get a new home, with a full set of warranties, no waiver of inspection or appraisal contingencies, and you are the only offer.

I fully recognize that new homes tend to be built in new communities and the appeal of the 1950s renovated bungalow in a mature walkable neighborhood is powerful. But winning a competitive offer scenario is beyond many people’s means.

So if you are not in a position to win a competitive bid, then building a home can make a lot of sense.

Summary

Yes, I get it. It is hard to look at the condition of the world and think, ‘Hey! I have an idea –– let’s build a house!’

That said, the US economy is far less tied to the world’s economy than most realize, and thus, pay more attention to what is happening within our borders than outside of them. The news abroad is ugly for sure, but the US tends to be the exporters of recessions, not an importer of them.

There is still a reset that needs to occur for sure –– hospitality, travel, office space –– they all need to figure out what the new normal is. That will take some time for sure and cause some pain, but it will get worked out.

Other economic impacts aside, when you step back and take a long view, you will realize that the housing market was already massively undersupplied –– and COVID actually worsened the problem, not helped it.

So to repeat:

  • Resale inventory is at an all-time low
  • New home speculative building has largely ceased
  • A demographic shift away from the crowded northeastern urban markets is already underway
  • The cost of materials is at or near 20-year lows
  • Builders are a bit fearful and likely to be aggressive to win deals
  • Mortgage rates are stupid low
  • No bidding wars

I simply cannot imagine a better time to build a house. 

What if Warren Buffett was a Realtor?

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Seriously, what if?

For anyone who studies investing, Warren Buffet is a household name. 

Buffett’s investment company, Berkshire Hathaway, is considered one of the most respected in the entire world. A single share of the company is worth in excess of $300,000, and Berkshire’s investors tend to hold their shares for decades, if not for life.

Warren Buffet Quote | Jahangeer Ansari | Flickr

According to most studies, Buffett is America’s 3rd wealthiest individual –– ahead of even Facebook’s Mark Zuckerberg. Buffett built his wealth not on a single company like Jeff Bezos (Amazon), Bill Gates (Microsoft) or even Zuckerberg, he built his wealth by investing in other’s companies. 

In other words, he is a pretty good judge of investing.

Buffett: Your Realtor

So imagine if you went to the local real estate office, asked if an agent was available, and up walked a genteel looking elderly man (gold jacket, name tag, business cards with gold embossing, of course!) and introduced himself as Mr. Buffett.

فائل:Warren Buffett Signature.svg - آزاد دائرۃ المعارف، ویکیپیڈیا

What do you think he would have to say about the housing market right now?

Buffett Quotes

Well, it is actually easy to imagine what he might say, considering he is one of the most quoted investors of all time.

When you read some of his most frequent sayings, you begin to notice several themes:

  • Invest in quality
  • Invest for the long haul
  • Invest more heavily in down (or fearful) markets

And man do they ring true right now!

My Favorite Quotes

When you look at what Buffett is saying, he is not just talking about stocks, he is talking about a philosophy that applies to all investments –– including housing.

So (you can tell already where this is heading) here are some of my favorite Buffett quotes –– especially the ones that capture the current state of the world and (of course) housing.

“If you aren’t willing to own a stock (house) for ten years, don’t even think about owning it for ten minutes.”

Meaning –– ‘think long-term.’

Too often, we get wrapped up in trying to time the housing market –– don’t.

The only time where true price declines occurred was in the wake of 2008 –– due to a complete abandonment of underwriting standards. But over the following decade, once underwriting normalized, the market recovered and by 2016, most segments were back to where they were before the crisis.

Are we due for a small adjustment due to Coronavirus? Perhaps, but the fundamentals of housing were strong before CV showed up –– and that has not changed. 

“Buy into a company (house) because you want to own it, not because you want the stock (price) to go up.”

Man, that one is sooooooo true.

Housing provides so much more than just a return:

  • It provides shelter, stability, and peace of mind
  • It allows access to education
  • It creates a network of friends and peers
  • It becomes a source of memories
  • It grants an expression of self
  • It offers control of your own destiny

Somewhere along the line, we stopped treating housing as, well, ‘housing,’ and started treating our homes as if they were 1,000 shares of IBM or Apple.

Simply put –– treating housing speculatively is not the correct strategy.

“Our favorite holding period is forever” and “Someone’s sitting in the shade today because someone planted a tree a long time ago”

Both are pretty self-explanatory –– another way to say think ‘long-term.’

‘The light can at any time go from green to red without pausing at yellow’

Corona, anyone?

Markets shift –– they always have and always will –– and they are under no obligation to give you fair warning.

Warren Buffett Rich Money - Free image on Pixabay

I think the lesson in this one is that quality decisions are far more immune to rapid shifts than decisions made due to market momentum. 

“Price is what you pay. Value is what you get” and “It’s far better to buy a wonderful company (house) at a fair price than a fair company (house) at a wonderful price.”

Yep.

Again, focus on quality.

“Risk comes from not knowing what you’re doing.”

I love that one, too.

  • Just because you can cook, it doesn’t mean you should open a restaurant
  • Just because you love IPAs, you shouldn’t open a brewery
  • Just because you won your fantasy football league, you shouldn’t buy an NFL team

Too many buyers feel that real estate pros are unnecessary because access to Zillow, Quicken, and HGTV programming are satisfactory replacements –– it is unfortunate. Having access to information is one thing –– understanding it is quite another.

Times like these are when a pro’s advice matters most.

And continuing the theme … 

“It’s only when the tide goes out that you discover who’s been swimming naked.

Brilliant.

So many agents, lenders, builders, and flippers –– as well as buyers and sellers –– entered the market AFTER 2008, and have never lived through a market that is changing direction.

When markets rise, especially over prolonged periods, mistakes are hidden by appreciation. In up markets, leverage matters far less than reserves, bad operators can make good livings, and being active is mistaken for being strategic.

But when the direction changes –– especially when it changes abruptly as it just has –– every weakness, regardless of how small, becomes exposed.

If you are naked right now, the world is about to figure it out.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” and “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

And finally, the concept of being an opportunist. 

When you make a series of good decisions over a prolonged period of time, the reward is being able to take advantage of opportunities when they appear.

Now –– I wouldn’t mistake that statement for saying that he tries to ‘time the market’ as much as he tries to take advantage of opportunities when they present themselves. No investor can truthfully claim that they see tops and bottoms, but the astute investor recognizes quality –– regardless of where they are in a market cycle.

Right now, there is a great deal of uncertainty, fear, and frustration in the market –– and that presents an opportunity for the shrewd investor.

WWWBD?

So, what would Warren Buffett do? 

Well, if you believe in his quotes, I think he would say something along the lines of –– ‘Well, since all investments should be viewed over the long term, and the market seems a bit fearful currently, it is a great time to purchase a great home. But that said, if your position is solid, a good home is always a good investment, regardless of market sentiment.’

No, I did not call him and ask him that, but I think he would concur.

Summary

I don’t want to be tone-deaf and simply say that it is a great time to buy a home for everyone ––  because, for many, it isn’t. Jobs are still at risk, consumer behavior will change, lending is not as fluid as it was, and the tax bill that is coming for this debacle will be staggering.

But for those who are on solid footing, this is a pretty amazing opportunity.

And in case you wanted to know, the market is actually doing surprisingly well. Yes, it is not the spring we anticipated, but March and April of 2019 and March and April of 2020 are not as different one might think.

While new listings are down a bit, purchase activity is still extremely high, mortgage rates are still low and the real estate community is able to function, albeit in a more virtual way than before. 

Don’t fall for the hype and let those without facts influence what you do –– make an informed decision. 

As a really astute investor from Nebraska with about $80B once said, “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.“

The Coronavirus Post

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I didn’t think I’d ever write a blog like this, honestly.

The idea that, in less than 2 weeks, a heretofore unheard of virus, named similarly to a beer you drink on vacation, could essentially toss a monkey wrench into our lives … well, that wasn’t really on my radar.

Worldometers.info/coronavirus is a fabulous resource for this

But it has, and here we are.

So if you would like to know what we are hearing and seeing relating to real estate and the local market, here you go (and if you make it to the end, there is something funny awaiting you!)

A Week Later…

Last week, we held a meeting about COVID 19 and went through a slide deck laying out what was known and what the future would likely bring. 

I think that the presentation got a lot of stuff right, but maybe I took a bit of an optimist’s view of things? The events of the last few days have convinced many of us that a bit more caution is probably appropriate. (Oh, and I do know how to say ‘authoritarian’ despite how badly I butcher it in the audio)

An Economic Sickness

One of the most difficult things to do in this day and age is to separate the signal from the siren. Twitter, Facebook, YouTube, and an endless supply of blogs and media outlets mean that pretty much anyone with an opinion has a platform. Essentially, this means that you can find a narrative to reinforce your world view. 

So, whether you fall in the camp of ‘this is the black plague and we are going to die’ or the ‘this is the common cold and this all about nothing,’ the fact remains that COVID is a virus for which we have no immunities, and as long as it is around, we will need to engage in economically damaging actions in order to contain its spread. 

Stated differently –– the only way to combat the spread of COVID is to decrease face-to-face interactions substantially –– which really hurts commerce. 

And that is the core issue.

Richmond’s Economy

In 2008, Richmond got beat up pretty badly … but so did everywhere else. In the grand scheme of things, our market hit was in line with the average across the US. Places like Florida, Arizona, and California all took much bigger hits.

In COVID 2020, Richmond will probably be hurt less than many other places due to the fact that very little of our overall economy depends on travel and tourism. Richmond’s economy is underpinned by government, education, banking, and many other white collar jobs.

Places where travel and tourism are integral parts of the local economy will feel the impact of Coronavirus tremendously and those segments will likely be in shambles for the foreseeable future.

WaPo and NY Times have written several articles about the RVA Food scene.

That said, Richmond’s restaurant scene is one of the country’s most prolific, and I am concerned about its ability to survive a prolonged slowdown intact. The best way to not come in contact with an infected individual is to avoid public places –– like restaurants. I sincerely hope that those who have the power to reduce the heavy tax burden borne by our restaurant community do so.

The restaurants are going to feel the pain first, the worst, and probably the longest.

Real Estate

From our perspective (real estate), we have not seen a notable difference –– yet –– but we do expect things to change in the following ways:

Sales Activity –– If you look at the YTD numbers, the market was roughly 20% ahead of last year in terms of transactional volume. Our MLS has tracked roughly 800 more contracts in 2020 than it had during the same timeframe in 2019. Demand was robust and inventory had dropped to all-time lows. 

I would be hard-pressed to imagine this rate will maintain itself at the same pace. Expect activity to slow down, but rates being as low as they are will continue to drive many into the market.

Mortgage Activity –– Up until the financial market’s crash beginning a few weeks back, mortgage originators were already super busy with the spring market’s volume. And then, rates dropped to unfathomable levels, which triggered the most refinance business ever.

In other words, the mortgage industry was operating at full capacity BEFORE the refi boom and now it is operating at 150 to 200% of capacity. No business can continually operate above their capacity levels –– and especially not if ‘work-from-home’ becomes the norm.

Expect delays.

Underwriting –– Yes, demand is robust, but the good news is that demand isn’t ‘fake demand’ like it was in 2008 –– it is real. Underwriting guidelines are reasonable and no ‘subprime-type’ lending is propping up the market. In other words, legit buyers are in the market, and they are using fixed-rate mortgages. That is a good thing.

Mortgage underwriting is healthy.

Fundamentals –– If you watch the embedded video above, you will get a sense of where the underlying market fundamentals are. In short, despite the recent turmoil in the financial markets, the real estate market is healthier than it has ever been:

  • Low inventory means no overhang if demand slows
  • A nationwide deficit of 3.5M new homes means demand is still far greater than supply
  • Low mortgage rates mean increased buying power
  • Low oil / gas prices mean more disposable income
  • Lower global demand means material prices for builders may come down
  • Better home equity means enhanced ability to upgrade
  • Low unemployment means more buyers

And, did I mention the stimulus that DC is pumping in the market as we speak? It is 2008-esque.

Right now, the market will likely slow some (it is inevitable) but once things return to normal –– Look Out! It will be insane.

Recommendations

Based on what we know and what we think is still to come, here is what we feel are the best courses of action:

  • All buyers and sellers –– please have patience and above all else, HAVE A PLAN B. Mortgage companies are going to miss dates and that has a domino effect. Also, employers might look at reducing staff (or at least hours) which can impact a buyer’s qualification –– even after the contract has been ratified and loan application submitted. Expect delays and even higher-than-normal contract fall out.
  • Sellers at upper price points –– be patient. The upper-end buyer tends to have more exposure to the financial markets and likely has lost a significant percentage of portfolio value. Expect traffic to slow and buyers to be cautious. So if you need to sell and sell now, moderate your stance on lower offers and inspection items. 
  • Sub $400k buyers –– there was less than 2 months of inventory in early March at the middle and lower price points. Multiple offer scenarios were common with in excess of 10 offers in many cases. Even if 50% of the demand goes away, that is still 5 offers. Don’t expect the more affordable price points to change dramatically.
  • Mortgage borrowers –– get in front of the loan process. The system is moving as fast as it can so don’t expect it to be able to pull off miracles if you are behind in your paperwork and documentation. Get your stuff to your lender early and respond to requests immediately. I cannot stress this enough.
  • And to everyone regardless of price or side –– work together to get deals done. If your counterparty needs time, give it. If you need to offer a rent back or restructure an offer to make up for a loss of cash in the market, you should. Renegotiating during the contract will become more commonplace in the interim –– so maintain a big picture view. Situations are changing rapidly and playing hardball will not yield the result you are looking for.

Summary

The sooner we can get this damned virus out of our system, the better for all of us. Yes, I get it that more people die from car accidents, cancer, and other maladies than COVID, but as of right now, we have to deal with it to move forward. 

As I like to tell my kids, many times things aren’t your fault, but they are your problem, and telling me what should have happened isn’t going to fix the issue. Fix the problem now, get mad about it later.

That is what we all need to be doing.

No, you needn’t sweat the real estate market falling off a cliff –– this is not 2008. In 2008, the market was leveraged to the hilt and largely incapable of fixing itself. In 2020, the market was far healthier when Corona showed up.

Once this clears, we will return to a real estate market with fundamentals as strong as ever. And as a matter of fact, real estate may even benefit from the virus due to stimulus packages and a global economy in a recession. Despite how we look at the end of this thing financially, I guarantee it looks better than everywhere else on the planet.

So remember to take the long view. The hype is real, but hopefully short term. It may take a few months and some substantial behavioral changes to stop the spread of this thing, but we will.

Laughter is the Best Medicine

And lastly, a bit of levity.

Yesterday, the talking heads on CNBC almost lost it when the one announcer asked a guest if he ‘likes stimulus.’ Sorry for the adult humor, but this really struck me as funny (fast forward to about :22 to get to the funny part) and I think they found it funny, too.

Sources:

worldometer.info/coronavirus –– This site has become my go-to for all things COVID. It shows the numbers in the aggregate and by country. Yes, China and some other countries might not be entirely forthcoming in their reporting, but you can get a sense of where all of this stands.

Web Traffic –– This site tracks web traffic to various websites and I am keeping an eye on Zillow’s traffic to gauge the public’s attention to housing. As this blog is written, I don’t see a dip in traffic, but that could change.

One South COVID Presentation –– The market stats are good at showing market strength. This presentation was from March 4, and the spread of the virus was not as prevalent in the US at the time ––perhaps a bit more pessimism should have been included in retrospect. Also, I have now learned how to say ‘authoritarian’ better than I did in the video…

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