What Will Real Estate Look Like After COVID-19?
Real estate agents are understandably concerned about how COVID-19 will affect day-to-day life. The death of the handshake. Wearing masks to PTA events. People actually washing their hands after using the bathroom (for a change).
Life after coronavirus may be hard to imagine. The way this pandemic has tarnished our world was unforeseeable, especially for real estate agents. Although many states have deemed agents essential workers and have received unwavering support from associations like NAR, the overall functionality of the job has changed drastically.
Certain states are beginning to open up operations but at very restricted levels. Regardless of whether these openings will be good or bad for the country, the main driver of how people will buy and sell homes depends on their fear and safety needs.
How Coronavirus is Impacting the Housing Market
As an agent, you need to be informed about how the housing market is performing in order to provide people a certain level of safety with what would have been considered borderline nonsensical measures just a few months ago. By doing this, you’ll gain a leg up on the competition and help sustain your business as we push through this pandemic.
Home Transactions are Shrinking
Homes sales usually pick up around March and sustain until the late fall. However, with the issuance of stay-at-home orders in major cities like New York and Los Angeles, home sales have seen a significant drop over what are supposed to be the biggest months to buy.
In the month of January - statistically the worst month for home sales - the U.S. saw 5.42 million transactions. This data point actually dropped during the month of March to 5.27 million. The year-over-year data actually increased by 0.04 million homes, but that number does not consider other economic and behavioral situations that uniquely influence every cycle.
1.1 US Existing Home Sales (2018-Present)
Date Homes Sold March 31, 2020 5.27 Feb. 29, 2020 5.76 Jan. 31, 2020 5.42 Dec. 31, 2019 5.53 Nov. 30, 2019 5.32 Oct. 31, 2019 5.41 Sept. 30, 2019 5.41 Aug. 31, 2019 5.43 July 31, 2019 5.39 June 30, 2019 5.32 May 31, 2019 5.33 April 30, 2019 5.23 March 31, 2019 5.23 Feb. 28, 2019 5.38 Jan. 31, 2019 4.98 Dec. 31, 2018 5 Nov. 30, 2018 5.21 Oct. 31, 2018 5.22 Sept. 30, 2018 5.18 Aug. 31, 2018 5.35 July 31, 2018 5.39 June 30, 2018 5.39 May 31, 2018 5.4 April 30, 2018 5.43 March 31, 2018 5.51 Feb. 28, 2018 5.61 Jan. 31, 2018 5.4
Demand hasn’t vanished. Instead, it’s being restricted by stay-at-home orders and general angst surrounding the virus. As things open up and safety concerns are met, home transactions should increase.
Sellers are Taking Homes Off Market
With tens of millions of people out of a job, we expected home prices to diminish due to liquidity needs. This is not happening. Instead of selling at a discount, people are actually choosing to take their homes off the market.
At the moment, people have enough to get by without taking a perceived loss on their home. This behavior may be attributed to several things, including the moratorium on foreclosures and the stimulus checks you may have received in your bank account this month. The housing market is in a Great Pause. Once the economy gets back up on its feet, we should see home inventory rise.
Home Prices Have Stayed the Same
In any other scenario, a decrease in home inventory coupled with the home buying power presented by historically low mortgage rates would lead to an increase in home prices. However, this has not been the case.
The main reason may be that there are simply not enough transactions to move the needle. Just like how the stock market functions, it takes a large number of homes to be sold at higher or lower prices to move the market. When no one is buying and inventory is low, the market is merely taking a Great Pause.
As we enter June, demand for homes should begin to increase, thus raising home prices. How high this number goes will depend on the stability of the economy and its unemployment numbers. If the majority of businesses open up and people get their jobs back, there will be more money to be invested. If the opposite happens, demand for homes will decrease with supply actually going up due to liquidity concerns. That is when you’ll see home prices drop.
Lenders are Adding More Restrictions
Back in March - right when the pandemic was just getting started - the Fed cut interest rates to 0 percent to stimulate the floundering economic growth. This rate cut was thought to be great news for mortgage rates. Instead, mortgage rates actually went up.
Some of this had to do with the stress on the processing system of home lenders. They received a barrage of mortgage rate applications and just didn’t have the ability to go through so many loans. So to help clear up their own bottleneck, they raised the rate to limit the number of applications coming in. Even with that rise in rates, they’ve now added further restrictions.
There is a belief in the industry that, due to the economic downturn from COVID-19, an applicant’s risk level is actually higher than their current FICO scores. “While investors kept bond rates at historic levels under 1.0 percent, mortgage rates did not follow on a downward arc due to the fact that banks and lenders are pricing loans for the higher risk they are assuming by raising FICO scores 0.68%,” said George Ratiu, senior economist at Realtor.com.
With millions of people unemployed and the economy just starting to open back up, it makes sense to assume everyone’s risk factor has increased and will stay like that for the foreseeable future.
*Since this article was released, mortgage rates have dropped to 3.13 percent. This number is at an historically unprecedented level that will help home buyers for the foreseeable future.
Subprime Mortgage Market Has Stalled
Subprime mortgages - also more commonly known as toxic mortgages - are home loans given to less qualified applicants, with FICO scores under 600. While this asset is designed to do good, the derivative schema directly linking these loans to the actual stock market was the key perpetrator of the 2008 financial crisis. Essentially, people did not fully understand the balloon payment mechanism and ended up going underwater on their mortgage. That mortgage was directly tied to high-volume traded assets (i.e. mortgage-backed securities), which led to the near-collapse of Fannie Mae and Freddie Mac. Those two government-backed companies became the dominos that set off the stock market crash.
Now, the non-QM market has stalled. “The pandemic has continued to cause turmoil in the worldwide economy,” Angel Oak, a home mortgage lender, said in its note to clients back in March. “Due to the constant shifts and the inability to appropriately evaluate credit risk, we are pausing all loan activity for two weeks.”
Home mortgage lenders do not have enough capital on hand to cover the inherent risk of supplying these types of loans. As we mentioned before, everyone’s risk number has taken a dip, even if credit scores do not show it yet. However, home mortgage loan companies are starting to get back into the market but are being extremely cautious about who qualifies.
What Will Agent Life Be Like After Coronavirus?
There are many uncertainties about what exactly life will look like after this is all said and done. From a macro standpoint, will it be the norm to wear your custom-designed Beanie Baby mask on a first date to a fancy French restaurant? It feels weird to even imagine our world suddenly being succumbed by a virus called COVID-19.
That being said, as a real estate agent you need to calm your buyers’ and sellers’ fears. By following social distancing protocol, you’ll create a safe space for them to comfortably do business with you — both now and in the future.
When meeting with clients, doing tours, and any other service, make sure to follow these CDC protocols to ensure everyone’s safety:
- Make Sure Everyone Wears a Mask
- Have Lysol and Sanitizer at All Times
- Provide VR and Facetime Tours for Those Being Cautious
- Open Up Windows and Doors for Air Circulation
- No Handshakes or Skin-to-Skin Contact
- Urge Touring Buyers to Not Touch Anything
- Wear and Provide Gloves for Everyone
Doing Business During COVID-19
Working in real estate during coronavirus can be tricky business, which is why we’re offering our Doing Business During COVID-19 course for free. Through this online course, we expand upon what we discussed here while breaking down everything else you need to know for effectively but safely working as a real estate agent during the coronavirus pandemic.