Oddly enough, because I write this blog, I get asked all the time by friends and colleagues what I think will happen to housing prices. It has become an even more repetitive ask in these abnormal economic times, as it applies to a wide swath of the population, including: homeowners, potential homeowners, real estate agents, mortgage professionals, economists, media pundits, those casually interested in the housing market, and so on. I do not have a crystal ball, and often the speculative answers vary depending on how the question is approached. However, I do know what will influence prices in either direction.
Prices in any market are determined by the most basic economic equation of supply and demand. If there is more supply than demand, prices will fall. If there is more demand than supply, prices will increase. Just try and find a can of Lysol disinfectant spray these days, and it will be marked up 2x or 3x on the secondary market. When it comes to the mortgage market, the overwhelming majority of homes that are sold are “pre-used” as opposed to homes newly built. As such, the majority of real estate markets are very sensitive to supply and demand pricing.
Supply and demand are often influenced by outside factors. A factor that enters real estate markets that impacts the price formula is interest rates for mortgages as they help determine demand. Lower interest rates mean lower housing costs, which means more families can afford to purchase homes, or families can afford higher priced homes. Higher rates mean the opposite, less affordability or able to purchase lower price homes. A change of 1% in interest rates can be the difference in qualifying for $100k or more of home when you apply for a mortgage. That drives demand, very fast.
Housing supply is also impacted by interest rates. As mentioned above, if rates are low, current homeowners discover they can purchase a bigger home or a home in a better area. Another option is to refinance their existing home to save money every month on their housing costs, and/or reduce the term of their mortgage debt without significantly changing their monthly payment. Currently, the coronavirus is an outside factor that is impacting the supply of homes coming to market. Many families who would have planned to sell their homes this Spring and Summer have decided to delay their plans to relocate because they do not want people coming through their homes who may be infected. Additionally, they may not wish to walk through other people’s homes as they search for their new home. Leading into the pandemic housing supply was already low, and it has become scanter over the past several months, which combined with dropping rates has fostered a rise in home prices.
Rates are the primary factor, but rates are not the only factor driving families into the real estate market. Many families have found during the pandemic that they want more room for themselves, more space from others, or a place that can be both a home and an office. Prices are climbing as new listings are bid on sight unseen, multiple offers are being made and very often homes are selling over list price. However, the question was not what is happening to prices, but what will happen to home prices?
The initial speculation at the onset of the pandemic was that when the CARES Act expired, there would be foreclosures in the future, creating oversupply. Couple that with the tremendous rise in unemployed workers, and you create an under-supply of buyers, driving prices down. Now that the pandemic has aged several months there are a few factors that I see which will result in most real estate markets not crashing nor seeing significant decline (10% or more) in prices.
Servicers in charge of forbearances have allowed borrowers to spread out their deferred payments over time, lessening the economic hardship on the borrower to bring their deferred payments current in one payment. Additionally, those expecting large increases in foreclosures are using the 2008 housing crash as the basis of prediction. The increase in home prices leading into the crash was fueled by cheap underwriting, which enabled borrowers to purchase homes and/or refinance – pulling out equity in their homes with no money down, no income qualification, no asset verification and in many instances no appraisals. As a result, millions of families owned homes with loans that they could not afford and in which they had no equity, making it easier to hand their keys to the bank and find a place to rent.
The third factor is the majority of those who have lost their jobs due to the pandemic do not have the income to purchase homes. As the employment numbers have dropped over the past month, average weekly wages have increased because the job losses are coming at the entry level wage jobs, not the middle and upper level wage jobs. Should job losses spread to industries not dependent on travel, entertainment, dining, we will see an impact on the supply of qualified buyers. At this time, however, it appears that the areas of the economy most impacted remain industries largely dependent on consumers discretionary spending. The final thing to consider is that it would take a major shift in either supply increasing tremendously and/or demand declining tremendously for home prices to decline significantly.
Because of these factors I do not see a significant decline in home prices occurring in most markets any time soon. In fact, the very opposite looks to be occurring. The outside factor that could alter that opinion is the length of the pandemic and how soon we are able to achieve the new normal with few, if any, segments of the economy being restricted due to the coronavirus. Our loan experts at RPM Mortgage are always on top of the home market. Give us a call today so we can discuss the financial landscape now and future possibilities.