So much has changed in the past few weeks. Schools are closed, people are working remotely or out of a job, panic buying has ensued at grocery stores and social norms are changing rapidly.
One would think that this would bring home buying and selling to a halt, but the reality is that we’re not seeing that – if anything the pace has increased. Possibly these are just homes that were already being prepared for sale, and buyers anxious to get settled, but it might also indicate that real estate is a stable, necessary part of our economy and also an investment class with lasting, time-proven value. The world is at a turning point that’s going to end in long-term changes, but the fact is that people need places to live, to work, and homes that they can improve and customize for their needs.
Certainly our home market is going to change, but it’s also important to remember that the social distancing and so forth will one day (likely 12-18 months from now) be a part of our past, and a life-changing act like buying a home is one in which we look to a timeline of 5-10 years.
Most Americans use home-ownership as a form of forced savings, and rely on market progression and building equity to help fund their retirements, and so would-be homebuyers see this time as an opportunity to get in a home, hopefully with reduced competition and maybe a break in price. Below are a few of our observations about what we think you should expect.
Right now, we have some fairly concrete changes, effective immediately in the Seattle Market
- There is a new form with every transaction, called a 22FM. The FM is for “Force Majeure”, meaning that if there is a force out of anyone’s control (specifically the COVID-19 virus in this case) that delays the contractual deadlines, the contracts are automatically extended. Like any contractual element, both the buyer and seller need to agree, so automatic extensions are defaulted to 10 days, but can be 5 or 15 days or any period of time really.
- Open houses cannot be held. For now, almost no one is doing an open house. Showings can only be two people at a time.
- Homeowners who work from home are ordering up a ton of work on their homes since they can be there to manage contractors and workers. The backlog of tradespeople and need for services is huge. If there ever was a great time to start your own painting / flooring / landscaping business, this is it. The projected outlook for home improvement is very positive.
- Sellers are sanitizing before and after showings, putting out hand sanitizer and limiting concurrent showings. Expect delays and limited access to showings.
- Moving is quite a bit more hassle. Sanitizing before moving in, etc is creating a much slower moving process.
- Lots of title offices are going “no contact” with closings, earnest money delivery, etc. Expect a few hiccups while these processes change and are re-standardized.
- Most agents (us included) offer video walk throughs, FaceTime or Facebook showings, etc. If there’s something you want to see, but are trying to do your part in social distancing, let us help. We can upload a full video tour from the street to every nook and cranny of the home, from a buyer’s perspective.
What’s stayed the same?
- There are still bidding wars on many properties, particularly in hot neighborhoods
- Inventory is still very very low. Buyers are waiting for new properties to come on the market and jumping on them the day they come on market if they are properly priced.
- In anticipation of extended work-from-home, the focus on centrally located properties has dropped, clients are looking further away, and features like land for growing things, storage and other sustainability features have come back into focus.
- Owners of AirBNBs are prepping their homes for market, due to dropped bookings.
Recessions don’t always mean a drop in home prices
It’s important to remember that the reason home prices dropped so dramatically in 2008 is because the entire housing system was broken. Buyers were not vetted well, loans were predatory, homes were sold and re-sold in the same day. The Fed did not have key tools to stabilize housing markets. Appraisals were essentially worthless then. Thanks to some great legislation and much tighter lending, the housing market is much more stable now. Nothing is systemically wrong with the US housing market right now, outside of swings in supply and demand.
When times get tough, the richest 1% invest in Real Estate
Because of it’s relative stability, real estate tends to be the investor “go-to” asset type when things take a downturn. Currently, real estate stocks are outperforming the other indexes by a fair margin. Multi-family real estate will feel almost no-effect (based on a study by Yardi Matrix) throughout the upcoming economic turbulence, and we think that this points to the fact that real estate is both stable (long term), as well as a good investment for those of us who are not among the 1%.
How will mortgages and buying ability be affected?
As you can imagine, in times of uncertainty mortgage guidelines become more strict. With lower interest rates, we find lots of people refactoring debt into lower interest rate loans, which means less profit margin for loan servicers, and in turn new debt must conform to tighter guidelines.
Here are some likely outcomes for buyers looking to purchase in the next 6-18 months:
- Your income / employment is likely to be re-verified 24 hours before closing. This used to be 10 days, but it’s likely going to be much closer now.
- Debt to income ratios will tighten up. This will likely disqualify 10-20% of buyers, which may end up easing prices a touch, since there is a correlation between massive escalations and buyers with shaky qualifications.
- Minimum FICO is now 600, it will likely be raised.
- Investment accounts can’t be used as payment reserves, and additionally payment reserve requirements might be raised.
Like all of us, lenders are going to go into survival mode, and that means that you need to roll with the punches during your underwriting. Typically lenders implement these guidelines individually, then hey become more industry standardized.