Archives March 2020

Highlights from this housing report:

• Will the real estate market crash in 2020 due to a shaky economy?
• That’s one of the most common questions we received last week.
• At this point, it seems unlikely that the housing market will “crash.”
• But home prices might drop in some cities, especially the pricey ones.

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From stock market investors to home buyers, it seems everyone has the jitters lately. And that’s understandable. Turn on the news, any news, and you would think the world was ending. (Spoiler alert: it’s not.)

The coronavirus has shaken the global economy, causing concerns among international corporations and small businesses alike. And those concerns are warranted. 

The biggest problem in the economy right now is restricted movement. Many countries have imposed travel restrictions and “lockdown” protocols to reduce the spread of the virus. That hurts all kinds of businesses, from restaurants to airlines to hotels — even your local coffee shop.

The bottom line is that we will get through this, as we have in the past. But there will certainly be a short-term impact on the world’s economies. How much of an impact is anyone’s guess. It’s just too soon to say.

But let’s turn our attention back to the housing market for a moment. Let’s tackle the big question…

Will the Real Estate Market Crash in 2020?

Will the U.S. real estate market crash in 2020, due to economic concerns spawned by the coronavirus?

That’s a hard question to answer at the moment, mainly because we don’t know how long the situation will drag on. That’s the key factor here — the duration of the crisis. But as of right now, it seems unlikely that we will see a nationwide housing crash on the scale of the one we saw in 2008.

What’s more likely is that the real estate market will slow down, as fewer and fewer home buyers venture out to buy houses. This in turn could lead to slower home-price growth going forward, or even a decline in some areas.

The housing markets most susceptible to falling home values are the ones with the highest prices relative to median income. Markets like those in the San Francisco Bay Area, where only a small percentage of local residents can afford to buy a house, are more likely to see a downturn compared to the more affordable markets with a higher percentage of capable buyers.

According to George Ratiu, a senior economist at Realtor.com, an economic slowdown could also result in fewer home sales nationwide and a buildup of inventory. In a recent Bloomberg article, Ratiu said:

“If there is a marked economic slowdown accompanied by job losses, that would put a lot of pressure on homeowners. We would see a change in the inventory situation. Instead of a severe shortage, you would start to see inventory ramp up as people get interested in offloading.”

But the fact is, we’re not there yet. All of these outlooks are speculative at this point. Possible, but speculative. We haven’t reached that turning point, at least not on a national scale. And we might not reach that point. A lot depends on how quickly health officials can get their arms around this virus.

House Values Continue to Climb in Most U.S. Cities

According to the latest data, home prices in most U.S. cities are still rising as we approach spring of 2020. And at least one forecast sees that trend continuing over the coming months.

As of March 16, the real estate information company Zillow had the following forecast posted on its website:

“The median home value in the United States is $245,193. United States home values have gone up 3.8% over the past year and Zillow predicts they will rise 4.1% within the next year.”

Of course, these predictions are based on current trends and conditions. And those conditions are changing as we speak. It’s certainly a fluid situation. But as of right now, the economists and analysts at Zillow clearly do not see a U.S. real estate market crash occurring in 2020.

Things Have Changed Since the Last Crash

The truth is it would take a lot more than a short-term economic slowdown to cause a nationwide real estate market crash in the U.S. It would take massive job losses and income reduction, on a national scale. And that’s just not happening right now.

The U.S. housing market is not nearly as “fragile” as it was during the last crash. In the early 2000s, reckless lending practices created a ticking time bomb of unaffordable mortgage loans. People who had no business taking on a mortgage loan were qualifying with ease, thanks in part to “creative financing” products like the payment-option ARM loan.

Say what you will about government regulation and oversight, but it has certainly created a more stable mortgage industry — and thus a sturdier housing market. Mortgage default and foreclosure rates today are significantly lower than they were ten or twelve years ago.

Mortgage borrowers today are also better qualified (on average) than they were during the last housing boom-and-bust cycle. There’s more income verification during the loan process today than in the past.

Containment and ‘Lockdown’ Measures Could Reduce Home Sales, Prices

As of right now, the U.S. has not implemented the kinds of strict containment measures we are seeing in some European and Asian countries. 

Many events have been cancelled, from Broadway shows to the Boston Marathon. Large gatherings are prohibited. And an international travel ban has been put into place. But so far, the free movement of individual citizens within the U.S. remains unaffected for the most part.

If that changes — if government officials implement a kind of lockdown to restrict movement — the housing market could take a bigger hit. People would be unable to go out and look at homes. Sales would decline. This reduction in demand would slow home prices and possibly reverse them, in some areas.

At present, this is a regional fight. Some parts of the U.S. have few or no documented cases of the coronavirus right now, while other states have many. And in those affected states, the highest concentration of cases are typically centered around major population centers (but not so much the outskirts).

So if we do see a kind of lockdown implemented in the U.S., it would likely apply to select areas such as New York City — not the country as a whole.

A broader lockdown scenario would certainly slow homes sales and probably chip away at house prices in some markets. But it probably wouldn’t cause a nationwide housing market crash in 2020, unless it dragged on for many months.

Here’s something worth remembering: A virus cannot cause home prices to drop, or cause the real estate market to crash. Not directly anyway. Those things occur due to changes in supply and demand, and consumer confidence. So a lot depends on how people react to the situation.

Disclaimer: This story contains forecasts provided from third parties not associated with the Home Buying Institute. They are the equivalent of an educated guess and should be treated as such. The publisher makes no claims or assertions about future economic conditions.

Will the U.S. Real Estate Market Crash in 2020, Due to Economic Uncertainty?

The Federal Reserve announced Tuesday that it will open a commercial paper funding facility to support the financing needs of companies facing stress amid the coronavirus outbreak.

The facility will support rollovers of commercial paper, a commonly used form of unsecured, short-term debt issued to raise funds. 

With businesses forced to close and with consumer activity capped by quarantines around the country, concern has built up over previous weeks that companies will not be able to find funding to survive the public health crisis.

The commercial paper funding facility will establish a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper from eligible companies as long as the paper is rated A1/P1 as of March 17. The facility would be available to companies of various industries, not just banks.

“An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak,” the Fed said in a statement.

The facility was opened in coordination with the U.S. Treasury, which will provide $10 billion of credit production via its Exchange Stabilization Fund.

https://finance.yahoo.com/news/fed-unleashes-commercial-paper-funding-to-support-nonbank-companies-144710054.html

The Federal Reserve made an emergency announcement Sunday afternoon by announcing that it would be cutting interest rates to zero for the first time since the financial crisis.

The central bank said it will use its “full range of tools” to battle the economic impacts of the novel coronavirus and announced quantitative easing in the form of at least $700 billion of asset purchases. It also encouraged banks to provide credit to the economy by eliminating reserve requirements and allowing the financial firms to tap into capital and liquidity buffers.

In a global effort, the Fed also announced standing U.S. dollar liquidity swap line arrangements in coordination with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. 

“The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals,” the Fed said in a statement.

The Fed said the coronavirus outbreak “harmed communities and disrupted communities in many countries,” adding that the U.S. labor market still appeared “strong” as the U.S. economy rose at a “moderate rate.”

But the Fed on Sunday slashed rates by 100 basis points, less than two weeks after it had already made an impromptu 50 basis point cut. 

“The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

The Fed also resumed the crisis-era policy of large-scale asset purchases by committing to Treasury purchases of at least $500 billion and agency mortgage-backed securities of at least $20 billion “over coming months.”

The central bank was scheduled to hold a Federal Open Market Committee meeting on March 17-18 with a policy announcement on March 18. In the face of accelerating cases of the coronavirus around the world, the Fed pulled the decision forward.

Maintaining credit

The Fed said it is “carefully monitoring credit markets,” where market liquidity has been a concern as markets churned over the impact of the coronavirus.

The central bank announced a number of measures on Sunday to motivate banks to support businesses as quarantines around the country raise concerns that businesses will have to close their doors and possibly lay off workers.

As a key regulator of the banks, the Fed said the financial institutions should feel comfortable tapping into the discount window as a tool for addressing “potential funding pressures.” In the past, banks have been hesitant to tap into the direct lines of funding because of the stigma associated with relying on the Fed for emergency funds.

The Fed said banks were welcome to borrow from the discount window for periods as long as 90 days, “prepayable and renewable by the borrower on a daily basis.”

The Fed also said firms could use their capital and liquidity buffers to lend, and reduced reserve

requirement ratios to zero percent effective on March 26. 

“This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.”

https://finance.yahoo.com/news/federal-reserve-cuts-rates-to-zero-restarts-quantitative-easing-qe-210001968.html

• The average rate on the 30-year fixed loosely tracks the yield on the 10-year U.S. Treasury bond, but it is no longer keeping up. The 10-year plummeted to yet another record low overnight, but mortgage rates, while also at a record low, are slower to fall.
•  One borrower who called Bank of America on Saturday was told there would be a two-hour wait to speak with a loan officer.  
• “It’s absolute pandemonium,” said Matt Weaver, vice-president of sales at Cross Country Mortgage. “The industry right now is certainly inundated with requests. Let’s put it this way, we are like Home Depot during a hurricane.”

A sharp drop in mortgage interest rates has sparked a sudden and unexpected refinance boom that has lenders large and small scrambling to handle the volume.

That stress on the lending market, as well as increased risk to mortgage investors from all those refinances, is actually keeping mortgage rates higher than they could be.

The average rate on the 30-year fixed loosely tracks the yield on the 10-year U.S. Treasury bond, but it is no longer keeping up. The 10-year plummeted to yet another record low overnight, but mortgage rates, while also at a record low, are slower to fall.

Mortgage rates hit 3.11% on Monday, according to Mortgage News Daily.

“Demand has ramped up in a way that many lenders have never experienced,” said Matthew Graham, chief operating officer at Mortgage News Daily, which tracks rates every morning. “Some of them have taken to raising rates in order to deter new business.  Others have completely stopped accepting new applications.”

One borrower who called Bank of America on Saturday was told there would be a two-hour wait to speak with a loan officer.  

At Cross Country Mortgage, a small lender in Boca Raton, Fla, phones were ringing before 8 am Monday. They have increased hours and are trying to find more staff to handle the volume, which is now triple the usual.

“It’s absolute pandemonium,” said Matt Weaver, vice-president of sales at Cross Country. “It is a supply and demand situation. The industry right now is certainly inundated with requests. Let’s put it this way, we are like Home Depot during a hurricane.”

Weaver says his firm is able to lower rates more than the bigger banks, because it has less volume, but there are also unusual profit and risk scenarios at play.

“It’s very complicated as to why mortgage rates aren’t a lot lower. One reason is lenders are dragging their feet, more for profit reasons than for concerns about handling the volume,” noted Guy Cecala, CEO of Inside Mortgage Finance. “If a lender’s costs of funds – either from MBS (mortgage backed securities) pricing or deposits – moves lower, but they keep mortgage rates higher than they normally would be, they profit off the larger than normal spread.” 

Weaver agrees that lenders have to watch their profit margins, along with the added volume.

“In these low times of course lenders have the juggling act of balancing margin vs. market demand, vs. the 10-year Treasury,” said Weaver, who added that his firm needs to handle pricing in a way that makes sure “profitability still remains there.”

At the big banks, rates are slightly higher than at smaller lenders. While no one we contacted would comment on why, they did speak to the enormous volume.

“We’ve paused email marketing campaigns on refinancing due to the thousands of customers who are already aware of the low rates and applying for them on Chase.com,” said Amy Bonitatibus, Chief Marketing Officer, Chase Home Lending. 

A Wells Fargo spokesperson said they are ramping up staff to deal with the onslaught.

“We continue to hire underwriters, processors and closers into our fulfillment group and we’re also executing on opportunities to shift team members from other non-fulfillment groups into our fulfillment operation,” said Tom Goyda, a spokesman for Wells Fargo.

And as for rates: “Lenders look at a lot of factors when setting mortgage rates and they are most directly tied to MBS yields, which have seen a widening spread relative to the 10-year Treasury yield,” added Goyda.

Investors in mortgage-backed bonds are at increasing risk because so many people are refinancing. When a loan is refinanced, it is paid off early, and the investor loses out on several more years of interest rate payment returns. As the risk rises, they will pay less for those bonds and therefore the yield on MBS rises – and mortgage rates rise.

“Investors are so spooked about what is going on that they don’t care about yield and are ignoring MBS and sticking with just Treasury bonds,” added Cecala.

It will take “time and market stability,” to get mortgage rates back to following the 10-year Treasury, said Graham. 

“If these Treasury yields become common, lenders can gradually lower mortgage rates without risking rampant refi activity,” he said.  “Eventually, mortgages would return to a normal distance from Treasuries.”  

https://www.cnbc.com/2020/03/09/mortgage-rates-could-be-lower-but-lenders-struggling-to-keep-up-with-demand.html