Blog with MAE Capital

OK the world has gone crazy, have you?  Do you have 2 thousand rolls of toilette paper, 15 bottles of hand sanitizer?  I get the idea of being prepared, but to hoard essential items is ridiculous, but with the media fanning the flames of hysteria I understand the effects.  What the average person doesn’t understand is how all of this works from an economic point of view.  We have a situation that we have never seen in history, and history is how we evaluate the present in economics.  Economics and theories that support the way markets interact are changing as I write this.  Obviously demand and supply is still in full swing, but in very different ways.   What we are seeing here is a rapid shift in demand from a wide variety of items that people want or need on a daily basis such as cars and appliances and other items that are nice to have but in the overall scheme of things  are not as necessary as food and basic need items like toilette paper and this is why we are seeing a rush on these items. 

So, it stands to reason that if the demand for those nice items such as Real Estate has diminished, temporarily, you will see some real change.  In the short term you will see Real Estate values will correct downward as people are not going to buy during these times.  People are also worried about their jobs going away or that their income will be cut from layoffs or even getting sick.  Interest rates are not helping with this at all, despite the Federal Reserve lowering their Funds rate to zero.  What people don’t know that Long-term mortgage rates are not controlled by the Feds.  In actuality, the mortgage markets have gotten worse and rates have risen significantly over the last few weeks.  Where the long-term mortgage rates, in the beginning of March, was down to 3% and now after all the panic in the markets long-term rates are up to around 4.5% or more.  Why is this happening? The answer is complex, but simply put, when everyone is trying to sell their investments and there are not enough buyers price has to go down to get people to buy.  When talking about interest rates you get an opposite effect as Interest Rates have to go up to attract investors to buy them (the Mortgage Notes), put simply. 

So, you have people with no jobs, or are laid off, and have a higher interest rate environment, the demand for housing dramatically down.  What you have here is a perfect storm.  The demand for housing or home ownership is going to stop until the world gets figured out.  The good news is that those that do own a home will most likely be able to keep it as the Government has enacted measures that will not allow mortgage companies to foreclose during this crisis.   Mortgage companies can offer forbearance as an option during these tough times, which is putting your mortgage payment off until you get your job back.  Forbearance, has to be granted it is not a given even in these times, you have to ask your mortgage company for forbearance and they will grant it to you if you can prove you have been financially hit.  So don’t just stop making your mortgage payment call first, but also know that you will have to pay the amount back that you are not paying now, it will be added to the end of your mortgage and you will pay interest on it. 

Renters that lose their jobs or can’t pay for some reason can’t be evicted for up to 4 month but know that you will have to pay that amount back within 2 years to your landlord, so if you can make your rent do as you will get way behind and may get evicted in the end.  It is always recommended that you make your housing payments if you can, because getting behind on payment that large may get you to a point in time where you just can’t make it up.  On the other hand, if you are renting and have been saving to buy a home and you don’t use that money to live on during these times you could come out of this being able to buy at low prices. 

If you have been considering selling your home, it might be prudent to wait until people get back to work in a few weeks to put it on the market.  Realtors in this market are seeing people that had their homes for sale prior to this put their listing on Hold.  What this means is that the sellers of property that put their listing on hold can’t show them or make offers on them but by doing so their listings are still being seen by potential buyers that after the crisis is over may be looking to buy.  As in the Stock Markets you want to buy low and sell high and I think that in the short term there will be deals for investors to get in on, but it will be short lived.  As this crisis ends and people go back to work their attitude will change towards buying again as they feel more financially secure.  If your house is on the market right now be patient and talk with your Agent as to how to strategize the sell of your home when this is all over.  I see that there will be a short-term drop in prices but will recover as the Stock Markets recover. 

This is unheard of and we have never seen this before on any scale let alone as large as it has gotten, global. With no history to look back on we just don’t know what is going to happen.  In history we had a pandemic in 1918 that ended up killing over 100 million people, we don’t see this happening with this one, but there was a war going on at time and no shelter in place orders.  During that time the war machine was roaring so the economy was not hit nearly as hard as this one with everything shutting down.  So, we don’t have anything else to compare to in history as to what is going to happen.  I can’t help but to think when this goes away what economic carnage will it have left for the entire world to mop up?  What I do see is that Interest Rates will come back down as the Government pumps money (liquidity) into the banking system and they start purchasing Mortgage Backed Securities again.  With Rates going down people will refinance their existing debt to lower rates and take equity out of their home to recover from this time.  For now, we all have to wait and be patient, put things on hold, and enjoy what we have and help others that may not be as fortunate.