Flattening the Curve and the effect on the US Real Estate Market

This very informative article was written by:

Lloyd Segal

President of the Los Angeles Real Estate Investors Club, LLC 310-409-8310

www.LAREIC.com

Economic Update (Monday, May 25, 2020)

The housing data released last week confirmed that the anticipated massive decline in activity in April took place. Existing home sales, housing starts, housing completions, and new permits are all down sharply. However, there also were several encouraging signs that a substantial rebound already has begun, as the economy slowly re-opens and weekly jobless claims continue to slow. Daily volatility in mortgage markets remained low, and the change in rates for the week again was minimal. Let’s get into the weeds…

Re-Opening Our Economy. Many more local businesses may open or expand service as soon as July 4. The Los Angeles County Economic Resiliency Task Force announced this holiday as a goal date for the county’s “safe reopening.” This means the county might see a full or modified reopening of dine-in restaurants, shopping malls, in-store retailers, and other businesses within weeks. Yahoo! That would appear to indicate the completion of “stage two” on the county’s road to recovery. But exact details of all categories of businesses that will reopen in this stage or what, if any, capacity caps or other restrictions would be in place, were not included in their announcement. While the July 4th date is a target, it will require continued trends toward containment of COVID-19. However, if things appear to be moving in the wrong direction, brakes could still be applied. Though new cases of COVID-19 continue to be confirmed daily, the Task Force noted that their urgency to expand business operations is fueled by concern for the most economically vulnerable individuals in our county. For example, more than three quarters of the job losses linked to the pandemic are workers with average annual incomes of $50,000 or less, and the largest concentration of those job losses has been in the retail and hospitality sectors.

Existing Home Sales (LA County). Sales of existing homes in Los Angeles County dropped a staggering 35.2% in April and down 26.6% year-over-year. The data from DQ News reflects residential transactions that closed last month, derived from opened escrows just before the stay at home orders went into effect in the middle of March. This means that sales in May will likely continue to decline. Sales were down across the board in April, with the pandemic disrupting and negating many deals in escrow. What has caused sales to plummet? Fear of infections has driven sellers to pause showings, inventories are low, buyers have shied away from purchases, and mortgage credit has tightened (despite historically low interest rates). Worse, jumbo mortgages (loans greater than $765,600) have evaporated because of lenders’

concerns with the severity and duration of the Covid-19 outbreak. Never-theless, home prices continued to show marginal gains from a year earlier. In LA County, the median home price rose 3.8% to $630,000 (median price per square foot is $437.00).

Existing Home Sales (National). According to the National Association of Realtors, sales of previously-owned homes slid nearly 18% in April as the pandemic upended the U.S. real estate market. This was the largest monthly drop since 2010. You can expect more softness in the near term as social distancing and government-mandated lockdowns weigh on activity, although April was likely the weakest month for sales. While it's true that many realtors are using virtual-tour technology to show homes to potential buyers, most people still want to see properties in-person before they make one of the biggest purchasing decisions of their lives. Current quarantine restrictions and social distancing measures are also going to hold back inventory of existing homes, as fewer potential sellers list their properties. Inventories in April were down 19.7% versus a year ago (the best measure for inventories given the seasonality of the data). The good news is that demand for existing homes is strong enough that 56% of homes sold in April were on the market for less than a month. One other interesting piece of data in the report was that despite all the disruptions, the median price of existing homes rose 2.2% in April and is now up 7.4% in the past year. This is in sharp contrast to the 2008 financial crisis when the pace of home price growth began falling well ahead of the recession. The coming months will continue to offer us a murky picture of the housing market. However, look for a rebound in activity as states continue to reopen and people get back to work.

Housing Starts. Housing starts reflects the number of new houses in which construction has started within the previous month. Houses include single-family residences, townhouses, condos, and apartment buildings. It is a leading economic indicator because it indicates future spending in the economy. More starts equal more spending down the line. And, of course, less starts equal less spending. In April, housing starts posted the largest monthly drop on record, as the first full month of Coronavirus lockdowns took their toll on construction. Housing starts declined 30.2% in April! Starts are down 29.7% versus a year ago. The decline in starts in April included both single-family and multi-unit starts. In the past year, single-family starts are down 24.8% while multi-unit starts are down 40.2%. Why? Because uncertainty surrounding future buyer demand, supply chain disruptions, and social distancing measures for work crews have all likely played a part in April's decline. Looking at the details of the report also shows that the slowdown was broad-based, with every major region of the country posting declines. In contrast, the pace of new home completions (as opposed to starts) has only slowed a bit over the past two months. This is likely because residential construction has been classified as "essential" in most areas of the country, so crews continued to work (though in many cases with fewer people per crew). Because of this, I expect the housing sector to weather the current economic contraction better than most other industries.

Building Permits. Building permits is one of the first indicators of whether the housing market is going to rise or fall. This is because, as you would anticipate, permits lead to new construction and new construction leads to other types of increased economic activity further down the line. And, of course, the opposite is true. On average, there is usually a month’s elapsed time between permit authorization and beginning of construction (see “Housing Starts” above). In April, new building permits declined 20.8%! Compared to a year ago, permits for single-family units are down 16.4% while permits for multi-family homes are down 23.6%, the largest decline since 2008. But the good news is that permits exceeded starts by one of the highest figures since the 2008-09 recession, suggesting pent-up interest by builders in starting more homes. Going forward, look for continued softness in the short-term, hopefully followed by a robust rebound in construction when issues surrounding the Coronavirus ease. Based on fundamentals like population growth and “scrappage” (houses torn down because of deferred maintenance, fire, and/or obsolescence), the US needs to build about 1.5 million new housing units a year, a level that was only briefly reached before the pandemic hit our shores.

Weekly Jobless Claims. More than 4.4 million unemployed Americans applied for unemployment insurance last week through the states or a temporary federal-relief program. This reflects persistent pressure on struggling companies to slash payrolls even as the U.S. economy slowly reopens for business. The good news is that the total, while still well above pre-coronavirus levels, is the seventh straight week of a declining pace following the record peak of 6.9 million claims in late March. Some 2.2 million people filed initial jobless claims in the traditional way through their state unemployment offices in the seven days ending May 16. And another estimated 2.2 million new claims were filed in 35 states through the federal government’s temporary Pandemic Unemployment Assistance program. Although, the historic pace of layoffs has tapered off since peaking at the end of March, unemployment has already ballooned to the highest level since World War II and is likely to get worse. Since the coronavirus pandemic and lockdowns started in mid-March, some 35.5 million people have applied for jobless benefits through their states. In Los Angeles County, over one million people have filed for unemployment insurance.

Mortgage Rates. Mortgage rates fell to near-record lows this week and there’s

reason to think they may drop even lower in the future. The 30-year fixed-rate mortgage averaged 3.24% for the week, down four basis points from a week ago, Freddie Mac reported. That was just above the record low set earlier in May of 3.23%. For the 15-year fixed-rate mortgage, the average rate dropped two basis points to 2.7%. Meanwhile, the Treasury-indexed hybrid adjustable-rate mortgage averaged 3.17%, down one basis point from last week. This decline in rates was prompted by comments from the Federal Reserve. The Federal Reserve indicated that they would keep interest rates low for an extended period of time to help the economy bounce back from the coronavirus pandemic. The still-uncertain outlook for the economy and seemingly low risk of inflation has kept bond yields in check. Historically, mortgage rates have roughly followed the direction of long-term bond yields, including the yield on the 10-year Treasury note. But that relationship has diverged throughout the coronavirus crisis. While bond yields and mortgage rates have both fallen throughout the outbreak, mortgage rates have not decreased as much as bond yields would suggest. That’s in large part due to friction in the mortgage industry caused by the massive wave of forbearance requests that servicers have received from distressed borrowers. With millions of Americans skipping their monthly mortgage payments, lenders have had to tighten their lending activity to cope, rather than drop rates. However, the spread between bond yields and mortgage rates means that the mortgage industry has some wiggle room to bring rates down even further. Meanwhile, the quotes that borrowers actually see will likely continue to depend on their creditworthiness so long as the U.S. economy remains on shaky ground, experts say. Borrowers with great credit who are seeking a straightforward loan are being quoted significantly lower rates than less creditworthy borrowers, resulting in a range of rates that tells a broader story than just the average rates described above.

Skipping Mortgage Payments. More than 4 million Americans have stopped making mortgage payments because of economic hardship caused by the coronavirus pandemic. That is a staggering number! And more than 4.1 million homeowners are now in forbearance plans, according to the latest data from the Mortgage Bankers Association. While mortgage servicers are still facing stress because of the record deluge of requests for payment relief, signs suggest that homeowners’ prospects have improved as parts of the country’s emerge from coronavirus stay-at-home orders. Overall, 8.16% of all mortgages were in forbearance plans as of May 10, meaning borrowers can either skip or make reduced payments. That was up from 7.91% as of May 3. The potential exception to this trend are loans backed by Ginnie Mae, including Federal Housing Administration (FHA) and Veterans Affairs (VA) loans. More than 11% of Ginnie Mae loans are in forbearance because of the coronavirus outbreak, compared to less than 1% before the outbreak. These loans tend to go to borrowers who are first-time homeowners with weaker credit — people who could be more exposed to the economic downturn the pandemic has caused. Overall, economists estimate that 15% of homeowners will fall behind on their monthly mortgage payments this summer. But the extended outlook for borrowers will likely depend on their ability to bounce back, particularly for those who have lost their jobs.

Baby Boom or Divorce Dilemma. Mortgage Bankers Association chief economist Michael Fratantoni has an amusing (but possibly true) analysis of a COVID-19 housing boom this year based upon an increase in divorces and a baby boom. His dueling hypothesis is that within three months from now the divorce rate is going to spike and nine months from now we are going to experience a baby boom. Fratantoni believes one or both of these phenomenons could happen and as a result cause an immediate increase in housing demand and household formation. Fratantoni says that another driver for a housing boom could be the increased desire for home office space. Fratantoni believes the crisis has weaken the demand for office space as businesses embrace the remote work environment.

The original article contained additional paragraph that have been removed because they were not related to the real estate market. For a copy of the full article please contact the author below

Source:

Lloyd Segal

President of the Los Angeles Real Estate Investors Club, LLC 310-409-8310

www.LAREIC.com

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