“ I heard the market was red hot and homes are selling for more than the asking price” this is what we are hearing daily from our clients. Is this true anymore or is something else going on now? All you hear on the TV and Radio is that the Real Estate Market is red hot, but is this really true? In my 37 years in the Real Estate and Mortgage business, I have never seen a market quite like this one we are experiencing. I also hold a degree in economics and have not seen anything like this in history. So what’s going on, one minute things are going crazy with low interest rates and more buyers than sellers. The next minute everything slows down.
This is happening across the board, interest rates are still at historic lows, but it appears everyone that has had the opportunity to refinance and take advantage of the low rates has done sone so. Or is it that, like COVID, we are about to experience a second wave of people refinancing and buying homes. We have never seen such a market in the past so there is no real model to judge this on. But we have seen a dramatic slow down in home buying and refinancing over the last 3 months. In California, they lifted the mask mandate, and it appears those that have been locked down decided to all go on vacation at the same time.
We generally see a summer lull in Real Estate, however, this one is far more pronounced than ever before. It has me and others asking if this lull is just that or is it something else? I do see this as the market seeking an equilibrium point, not an all-out bust. I have seen big news in the markets before and the way the markets tend to react to this is by over-correcting on both sides. I would liken this to stretching a rubber band and letting it go, it will spring up then back down then reach an equilibrium point. Right now, in the real estate market, we are seeing a bounce down or a slowdown after it was super-heated.
Another factor that we have not seen before is that California was shut down for 15 months and people were told to stay inside and not travel. In a normal year, people would travel all time of the year but the last year and a half have been far from normal. What we saw during the pandemic was people staying home not traveling, so when they were told they could now go out and about they did and they are still are taking vacations and traveling not thinking about Real Estate or their mortgages. Couple that with their kids being out of school they are taking full advantage of the time they have out of their houses seeing family they have not seen in months and enjoying the outdoors while the weather is good.
Understanding how humans think is a big part of economics. So as schools reopen in August and kids head back to the classrooms that will leave the parents back home and working with the time to think about their living situation and their financial situation. Coupled with low-interest rates that the Federal Reserve says they are keeping low until 2023 I believe that the Real Estate market will pick up again by the end of August and into September, but it will not be at the pace we saw during the height of the pandemic thus the bounce. Another interesting phenomenon that will be discontinued in September is the extra $300 a week in unemployment benefits. This will send people back to the workforce, but will the economy be able to accept all of these long-term unemployed folks that took advantage of the system? As an employer, I would not hire an able-bodied person who chose to stay on government assistance rather than work as that shows me laziness and I think this will be a big issue in the high-end job market. Entry-level jobs like Walmart, retail jobs, and restaurant workers will be happy to take these folks back into the workforce as those workers can easily be replaced if they don’t work out. But I digress, those entry-level workers will not be homebuyers in the immediate future but having them back in the workforce will allow management and owners to realize a better income level so those folks will be the benefactor of the ability to purchase real estate. So my crystal ball says that by September we should start to see Real Estate pick back up for all the reasons that are not the standard reasons for Real Estate to boom or bust. To get started today and beat the rest of the crowd call one of our Real Estate Professionals to get pre-approved for a home loan and start your search as new listings hit the market you will be there first. If you have been waiting for your credit score to improve before refinancing start now ahead of the crowd Interest Rates are still in the 2’s and 3’s. Call MAE Capital Real Estate and Loan to get started at 916-672-6130.
Well, here in California we are one of the last states set to re-open on June 15th, politics aside. What will this mean for the red-hot Real Estate market? We are currently still experiencing a shortage of home listings on the market, and we have demand still exceeding the supply of listings. What will loosen up the market and get Real Estate back to a normal where the average person can get into the market? What effects are inflation having on the market? In this blog, we will be exploring the possible scenarios that could happen with a re-opening and what those consequences are.
First, we need to ask why are people not willing to sell their homes and will it change? In my opinion, I think the main reason, from what I am hearing from our clients, is that there is nothing to move up to. Simply put, if they do sell their home where will they go if there are no homes for sale in the area they want to move to. People have a fear of being homeless or paying more than they can afford and with no other homes to move to this is a major problem when it comes to freeing up inventory. This is what is called an inventory shortage where demand for homes exceeds the supply of homes for sale. Builders are trying to meet the demand, but the rising costs of materials are making the cost of building homes more expensive thus home buyers are getting less home for more money. So, for a potential home seller moving up becomes a lateral move, not an improvement so they hunker down in their current homes waiting for the market to change. Another phenomenon we are seeing is that older homeowners who would have sold and moved down are not doing so and staying put in their family home as it is cheaper to stay in a bigger home with low property taxes than it would be to move to a smaller home and have to pay more in property taxes, especially in California. Those that have decided to move from the family home, we are seeing, move out of state where taxes are lower and property prices are cheaper, again not so good for the California economy.
Another economic factor that we are dealing with is inflation. This will keep people in their homes as well when they realize that the new home, they would qualify for is on the same level as the house they are selling making it foolish to sell and move. In addition, inflation makes the cost of goods and services more expensive, so for potential move-up buyers inflation makes their income go far less and the costs of living is more expensive in their current home. If you are paying more for food, gas, and consumer goods, and your income is not going up as fast, it makes the money you have, get eaten up quicker, so saving money becomes more difficult. Inflation also makes building costs go up and the prices of new builds go up as well as we talked about earlier. People want to feel comfortable before they make a move up to a higher mortgage payment and this is another factor why people are not putting their homes on the market. We are in a territory never seen before, so as the government enacts monetary policy and new taxes and spending we will not see the end to this volatility for a long time.
Looking to the future when California is fully open what will we see? The first major problem we will see is the fact that California is keeping the extra unemployment benefits ($300 extra per week) until September 11, 2021. What this is doing, and will continue to do, is to keep workers from going back to work where they would be making less money working than staying on unemployment. To analyze this phenomenon, we must first look at the jobs people are not going back to work at. These jobs are generally restaurant workers and retail workers and entry-level workers. The workers that have not been working and receiving unemployment and the extra $300 a week have been taking their extra money and investing in the stock market and Cryptocurrency; thus, we have seen record highs in the stock market and crypto’s, this will go away when the money goes away, and they have to go back to work and begin paying bills with their earnings. So come October, when this will be felt, we might see a stock market correction. If we get a correction in the stock and equity markets people feel less secure as their investments will be considerably less than they expected forcing people to look to the equity in their homes for the extra money other than the stock market. This may force some to sell their homes or it will hunker them down even more and possibly refinance their home again. Then looking to those millennials that have been living at home for the last year and a half will have even less opportunity to move out as there will still be no homes to move into and this will keep demand strong for homes even at higher prices.
Not knowing what will happen in the immediate future as things re-open, we do know that over time Real Estate is one of the best investments you can have. So, what will pop the Real Estate Bubble this time? We are looking at economic times we have never seen before coming out of a worldwide pandemic. We are currently experiencing inflation, and, in the past, the Federal Reserve (the Fed) has raised interest rates to combat this, however, the Fed has said that they will not raise interest rates until possibly sometime in 2022 keeping rates low to keep the economy moving forward. The fear is that we will have “Stagflation” which is inflation with a stagnant economy. I am also taking into consideration that in October of this year the interest rate markets and the stock markets look 90 days ahead, so if inflation is still out of control in October in 90 days it will be 2022 and that could cause or help a stock market correction and higher interest rates. To get people to sell their home they need to feel comfortable with their current financial situation and until that happens, we will see people hunkering down in their current home until they feel comfortable enough with their personal finances to sell and move up. Hopefully, the re-opening will do that with people going back to their offices and business and can enjoy profits again and the supply chain of goods and services can catch up and inflation cools off.
This is all a guess based on what people will do. The thing is we do not know how the re-opening will affect Real Estate yet, but we know the demand, as it stands today, will be there until prices or interest rates rise to a point where the demand goes away. We do know that low-interest rates always help real estate sales but that is not what we are looking for as we have enough demand, we just do not have enough inventory for the demand, and it will take a while to catch up and for builders to build and for sellers to feel comfortable selling and moving up or down. What I do know is that the more money the government puts into the economy the higher inflation will go. We have seen this already and sadly the dollar has gone down against every major currency in the world. Although it is nice to receive money from the government it has become more harmful than helpful to the overall economy. If this government spending trend continues, we will continue to see inflation and if the Fed doesn’t raise interest rates inflation will continue unchecked and everything will cost more. As we see monetary policy and spending come from the Federal Government, we will see the overall direction of the housing market evolve. The market watch will be month-to-month as we watch the economy and government policies. If you have been on the fence about refinancing this is the time, without a doubt, as interest rates will go up and that you can bank on, and my best guess is this will happen around October of 2021 so get in now if you need money or think you will need money as the price of money has never been cheaper. In conclusion, what we know for sure is that interest rates will be heading up, Real Estate demand will remain high until prices go too high and income can’t keep up with inflation and we know that Real Estate is a proven investment over time so good luck and let the team here at MAE Capital Real Estate and Loan walk you through the Real Estate and the Loan process.
Post-Script June 21, 2021: The Fed has announced that they will keep interest rates low until 2023. This seems really unrealistic unless inflation slows down dramatically in the next several months. If this is actually the case we have seen this before in the early 2000s when the government kept credit flowing by allowing the subprime markets to flourish for years after they should have and that led to the "Great Recession" starting in 2008. I am not saying that will happen but it sure points to that. The longer the Fed holds the market in an overheated nature the longer the correction will be in the future.
We are now hearing that COVID-19 infections have slowed to levels where the leaders of our country are beginning the opening process of the economy. This is great for the rest of the world but in the Real Estate and Mortgage business, we have been enjoying low-interest rates and a booming Real Estate market. I know this is odd when so many people have been out of work or working reduced hours. What we have seen is that those in the entertainment business and restaurant business have been hit the hardest. The technology sector of the economy has exploded during the lock-down with Zoom and video conferencing leading the charge. We have seen a significant increase in online ordering with consumers realizing the ease of ordering their goods and services online from the safety of their own homes. But now that the economy is opening again what do we expect to see from here, are we going to see changes in consumer habits with regards to how they get their goods and services, are they going to go back to restaurants, malls, are they going to be distracted from buying Real Estate?
These questions are what we will be exploring here. Why has Residential Real Estate boomed when we had high unemployment? I believe the answer is that interest rates have been at historic lows with consumers able to lock in rates in the 1’s 2’s and 3’s. With interest rates, so low people have been able to qualify for larger homes and been able to refinance their existing mortgage to a low rate even if there has only been one person working in the household. People that have been confined to a small home have seen the walls start to close in quickly and they have realized that they need a bigger space. Add kids to the picture and people have found that moving from cities, where housing is generally confined to smaller spaces, to the suburbs where they could afford a larger home with a yard has been one of the Pandemic phenomenon’s we have seen. Will this trend continue? This remains to be seen, as Cities when they are thriving, have fine dining, close shopping, and entertainment venues, and a variety of social activities that the suburbs don’t. Will people go back to cities or has the idea of being close to other people become a bad idea for health reasons, will people stay away from large crowds? These are questions I can’t answer but time will tell. One thing I have learned about this pandemic time is that nothing has gone as you might expect with regards to the American way of life so as people invent a new way of life we will have to pay close attention to new trends.
While Residential Real Estate has boomed during the pandemic commercial Real Estate has died off almost completely. With giant office space where people, prior to the pandemic, worked in full capacity now have gotten used to working from home. Companies that have traditionally been driven to office collaboration have migrated to meeting over video platforms and staying productive without the need for expensive office space. As leases expire, I am not sure if companies will re-up them or reduce the space that they require. This tells me that commercial Real Estate will be on a long road to recovery. As for retail space and malls, I believe it will be a long road if it ever comes back as it looked like prior to the pandemic as consumers of all ages have embraced online commerce where they don’t have to leave the comfort of their home to get what they want. This leaves existing retail and office space vacant which is terrible for the owners of these properties as they are not receiving the income they did prior to the pandemic. This also remains to been seen how the demand for this existing space will expand into the future.
With the economy opening up and as the government spends “COVD Relief” money like it grows on trees, we will be seeing inflation as the US dollar will be devalued against other countries' currencies. With inflation, we will see rising interest rates to slow down inflation by making the cost of money more prohibitive. The rising interest rates will cut more people from the Real Estate buying frenzy as with higher interest rates people can’t qualify for as much of a home as they did with the low-interest rates. This should slow demand for housing probably in the late summer of 2021. In addition, the higher interest rates will slow the refinancing boom as well with most of America has taken advantage of the low rates in 2020 and the beginning part of 2021 will not have the need to refinance again. There will be some folks that could not refinance for various reasons, such as loss of a job, or decreases in pay, or self-employed, and for those reasons, we will see demand being slowed but still steady. Another factor is the Federal Reserve has said that they will not raise the rates they control until there is a 2% or the greater inflation rate, which they are not seeing happening until late 2021 at the earliest. So, the Federal Reserve will keep rates low until the time they see inflation higher than they believe is healthy.
For the better part of 2021, the Residential Real Estate market will continue to thrive until the demand has been fulfilled. This, of course, will vary depending on the Real Estate market you are in. If you are in a large City it may take a while for all sectors, Residential and Commercial to recover. If you are in small cities and towns where people have been moving to from large cities, I believe the demand will continue to be high until big cities have fully opened and all their services are back up and running. People will still be hesitant to move to cities out of fear of the Government shutting things down with another pandemic or something else the Government thinks they need to protect us from. That said interest rates will in 2021 will stay in the 2’s all the up to the low 4’s depending on inflation. Residential Real Estate in the suburbs will stay strong commercial Real Estate, I fear, will be on a long road to recovery. If you are looking to refinance or buy a home this year remember that MAE Capital Real Estate and Loan is your go-to for the lowest interest rates and fast service.
We are now in week 3 of the mandatory shelter in place order. Since my last update things have become clearer on why we are at a standstill. On the Real Estate front, it is pretty easy to report on as it is stopped for the most part except for existing purchases and some commercial deals. Our private money division is still seeing activity and people willing to lend in this environment, but it has slowed as well. Interest Rates have not done us any favors over the last week, but we are seeing some life as things start to get figured out. The appraiser dilemma is in the beginning stages of getting figured out as well.
Let’s look at interest rates and why they have not gone down to the lows they should be at. I read an article this morning that clarified things for me a bit more in an area where I had not paid attention to until now. The area of lending is the servicing side (where mortgage companies collect your payments). Think about it, if the government has mandated mortgage companies to stop collecting payments from homeowners for a period of at least 90 days what will happen to the mortgage company? Mortgage servicers must collect payments from borrowers and then they have to pay out on the bond they created and sold to Wall Street. The mortgage servicer still must make payments to Wall Street but if they have not been able to collect payments form the borrowers they will go broke quickly. I believe this has a large part to play in how new loans are being priced up front.
The 2 Trillion-dollar Stimulus Bill that is being signed by the President today does not carve out any funding for mortgage servicers as they don’t fall under banking in most cases. What this means is that while the Government has suspended mortgage payments from borrowers the lenders still have to make their payments on their bonds to Wall Street. This will get figured out in the next round of Stimulus, we hope, but until then mortgage bankers don't have their servicing portfolio to hedge their origination pricing so interest rates will stay high. Until this aspect of the mortgage industry is figured out we will see higher than normal interest rates and a degradation in service from all originators in the mortgage industry. As it stands all of the loan companies have to go to the same well to get their water, so to speak, so no one company in this crisis will outshine another for this reason. At MAE Capital we are a Broker which means we have access to funding across the nation, so we have our finger on the pulse of this evolving issue. MAE Capital will also be the first to find lenders that are willing to lend or adjust their rates down and when the market changes we will be on the forefront of the new economy.
As for appraisers in this market, which is another hold on closing loan transactions and Real Estate deals. Fannie Mae (FNMA) just announced new guidelines regarding what is acceptable for appraisers to deliver in this market. FNMA said that appraisers can do a drive bye appraisal and the agent or the homeowner can send interior pictures to get an appraisal done. FNMA also gave guidelines on “Desktop Appraisals” which are appraisals done from information only such as public record information and MLS information any other sources other than physically going to the house. As for refinances we are seeing more appraisal waivers being offered for those borrowers with good payment history and a lower loan to value. All these steps are positive and are moving in the right direction, but the time to implement these new guidelines is a major hold up.
Meanwhile the market for Jumbo Loans and non-Agency loans (non FNMA, FHLMC, GNMA) and non-qualified mortgages have basically closed down. In fact, today we got news from a few “Non-QM” lenders that they have shut their doors indefinitely as they have no money to lend. What this does is take an essential segment out of the Real Estate market that is essential for many investors seeking capital for fix and flips, construction, and rental property loans. We have received several notices today that companies have closed their doors that originate and close these loans. This market will take months to come back if ever.
On a positive note, I see the Qualified Mortgage market (Agency loans; FHA, VA Conventional Loans) coming back in the next 3-4 weeks as this all get’s figured out and the Stimulus Bill. I say 3-4 weeks but that could change based on the “curve” flattening out and how the contagion mutates and changes and hangs on in our society. The mortgage market will need some definite infusions of money from the Stimulus Bill in the serving side of the business before rates can come back to where they should be. We will be seeing interest rates in the 2s when this all shakes out so if you have been thinking of refinancing now would be the time to get your paperwork in order. However, if you have lost your job we can’t refinance you until you are back to work, but that may change as this evolves too. So this virus is killing us in more ways than one, but as Americans we will persevere.