As states across the country start talking about opening up and going back to work, we can start assessing the damage done by the COVID-19 pandemic. Our Q1 data shows that housing prices started off solid, but the market has definitely slowed down in the last few weeks as the shutdown has begun to impact the real estate data.
You need to remember that real estate is a slow-moving economic niche. It’s not like stocks where commodities are bought and sold with the click of a mouse. It takes time to show the house, find the buyers, sign the contracts, and close with the title company. So there is going to be some natural lag. What we see in the stock market won’t immediately show up in the real estate market. When stocks were down 50 percent in 2008, it took three years for real estate to follow. With 26 million people out of work, we are going to see some foreclosures, but it’s not going to be right away.
Rather than guessing over where I think the market’s headed, I talked to Daren Blomquist about the data he’s aggregated for us. As the VP of market economics at Auction.com, Daren spends a lot of time poring over nationwide trends, and he has some solid data about retail market trends, investor insights, and distressed market trends.
WHAT FIRST QUARTER RETAIL MARKET TRENDS LOOK LIKE
There are two main indicators of the real estate market: the first is retail sales and the second is home units. According to Daren, there’s been a nearly 45 percent drop in home units, but that doesn’t mean that prices are dropping. Supply is down, demand is down, but Daren is seeing an increase in the price of homes in the $375,000 range.
The impact of the lockdown cannot be understated. People that might’ve been looking for a house are having to hold off or have changed their minds. People that might’ve planned on selling and moving are having to stay put while they wait for their states to open up again. It’s normal that home units are down, and it’s not an indication that prices are going to start falling yet.
Currently, supply is down, which would indicate that sales will go down too, and then prices would follow. But Daren’s not seeing that here. Supply is leading here and it’s down more than demand. It’s currently down 52% when comparing year over year levels. Demand is down, but only about 25%. So prices continue to hold steady in the real estate market. For now.
Ascertain markets start to open up, I think we’re going to see a little more volatility. Week by week, the data that Daren’s looking at has been changing just as quickly too. Buyers want to look at vacant homes, but they’ve also shifted to shopping virtually for homes. Social distancing guidelines may continue to impact housing trends long after quarantine orders are lifted. We will definitely be keeping a close eye on this as we go into Q2.
HOW DISTRESSED MARKET TRENDS MAY IMPACT REAL ESTATE
One of the biggest unknowns right now is how banks are going to respond to the unemployment crisis and the forbearance loans that are being offered. Banks are going to have to get flexible about these loans by adding the amount to the end of a mortgage or something else, or they’re going to have a lot of defaulted home loans. The average American who is living paycheck-to-paycheck isn’t going to be able to come up with all of the arrears in months 4 or 7 when the forbearance period ends, and that may dramatically impact the future foreclosures.
If banks have mortgages on the books that are non-paying, then banks have to set aside more money in reserves to offset those delinquencies and defaults. This is the domino effect that we have to keep an eye on because then it decreases banks’ liquidity, and prevents them from loaning out money. All of these things are interconnected.
During the hurricane season of 2017 when banks offered forbearance, only 1% of the homes that took it actually went into foreclosure. That means that 99% of people pulled themselves out of the hole they were in. I’ve also seen some data showing that Fannie Mae and Freddie Mac are going to buy some of these forbearance loans in bulk, which could improve bank liquidity.
If banks aren’t willing to be flexible, we could be right back to 2008, ‘09, ‘10 all over again. I’m really hopeful that bankers have learned their lessons from just twelve short years ago.
MY PERSONAL INVESTOR INSIGHTS FOR YOU
How this pandemic situation impacts you will depend on what kind of investor you are. Are you a buy-and-hold guy? Or are you a fix-and-flip guy? If you’re dependent on the after repaired value of a house, and the housing prices go down, then you might get caught if the market corrects. However, if you’re in this for the long-term, you’re not going to be too worried about all of this volatility. In fact, when houses are foreclosing, this actually helps the long term buy-and-hold strategy because people will start moving into rentals as they lose their houses In 2008-10, housing mortgages were the problems. But this time, I feel like housing in this environment could be part of the solution. We don’t have a liquidity problem or massive amounts of foreclosures yet. It’s still possible for banks to work this out in a way that prevents massive foreclosures.
When I talk to my investors, I think that dry powder, cash, and liquidity are really important right now because we were already seeing an uptick in foreclosures. Cash will help you scoop up deals when everyone else is holding off. Prices aren’t going to crater through the floor any time soon. It’s going to take time to get all of these current foreclosures through the system, and meanwhile, both supply and demand are down, which is helping to stabilize the market.
If you have any properties that you’ve even been thinking about selling, now is the time to put them on the market. Prices are still holding steady, and supply is still far below current market demands.
Be Daring,
Josh
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