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Buying in the pandemic… what additional factors should you take into account?
April 22, 2020
If 2020 is the year for you to buy, what can you expect? For starters, some increased volatility with both the lending market’s fluidity and regulations as well as sales prices. First, increased uncertainty leads directly to higher interest rates or at least greater volatility of rates- meaning they may swing by fraction of percentage points even within a day. This in itself probably isn’t the end of the world as rates are still historically low- I mean they are basically swinging from really low to really, really low. Probably best to pay attention to changing lending requirements. You may need a higher credit score, larger down payment, have to pay points and may need to go to more than one lender to find the right options. As far as sale’s prices, are you going to find that deal? Maybe, maybe not. Remember the real estate market is notoriously slow moving as in it reacts to economic changes in almost a delayed manner than say the stock market. Of course, you may find a seller that has to sell and frankly it is more difficult to sell right now. So, those type of transactions would be in the buyer’s favor. Of course, sellers that can are more likely to pull their listings from the market, leading to lower inventory. Finally, keep in mind how this economic instability impacts you as the buyer directly. Before purchasing and taking on the financial responsibility of a mortgage, you would want to feel really confident in your own job security.
You are not alone if you have noticed that the typical 4% annual increase in your home owner’s insurance is a thing of the past. Some are thankful just to have a policy. With increasing volatility of extreme weather related property loses, the insurance market has been reeling and the vast majority of us have been paying. Time will tell if extreme weather will become increasingly the norm. And, if it does, how will the insurance market react? In Florida private insurance companies are mitigating loses by closing shop and the state sponsored insurance has become the biggest carrier. This translates into higher costs for home owners and/ or greater risk as more homeowners opt to forgo insurance altogether. Again, this burden will disproportionately affect middle and lower classes as homeownership becomes elusive in its affordability or even practicality. Although I am not a big advocate of increasing government involvement, this is an area homeowners should get assistance.
So, the Federal Reserve met this week and kept the fed funding rate constant. Further, they hinted of some possibility that there may be 3 small rate cuts in 2024. While the fed lending rate does not directly influence the 30 year mortgage rate, the economic data around the Fed’s decisions do. It seems the Fed is ever closer to achieving that allusive economic soft landing. Consequently, we saw an immediate drop in the 30 year rate- much welcome news to borrowers. Greater indications of economic stability ahead (more “normal” fed lending rate, inflation cooling, and overall economy not sputtering) will lead to further relief in mortgage rates. How will this impact the market? Visually, you can imagine a spring that has been wound tighter and tighter emblematic of pent up demand—all those buyers who couldn’t afford to buy with high rates and all those sellers who didn’t want to leave their 3% mortgage rates: lower rates will release that spring. It is still time to get in the game now before this scenario plays out. The cost of refinancing to lower rates will be offset by potential increases in sales price from pent up demand.
Have we finally hit a ceiling? For the first time in years, some of our rentals sat. Sure, our priced right rentals aimed at middle and lower class renters were still swamped but higher priced rentals have become stagnant. There is still a lack of inventory but, with many new construction rental buildings in the Providence area, some of the edge of at least the higher end market has been softened. This will benefit middle and lower class renters, as units they traditionally habited that became priced out of their range, will slowly become available again. Investors will need to plan accordingly and remember Zillow isn’t the bible- it takes more a temperature of what rentals are being offered at, not how long they are sitting. I think it is time to be more realistic with rent prices and pray that everyone who bought high can still generate adequate cash flow. After all, we do not need any more instability in the housing market.
It has been in the news a lot lately… and, yes, it is true zoning trends can lag or even create housing needs. Single family zoning laws, borne in the early 20th century, became more restrictive with the growth of suburbs in the 1970s in an effort to protect residential home ownership from any negative impacts on its value. Now, there is need for a change with the limited housing supply and limited buildable lots. Thankfully, RI Legislature has been up to something good. Next year, new laws will come into effect enabling previously unbuildable lots to be buildable. RI isn’t throwing away all caution and normal processes remain in place to make sure lots are suitable. But, for substandard size lots, as long as they are a legal lot on record, setbacks would reduce by the ratio of the actual versus allowed lot size. This is just one example and there is a lot to digest but the intent is to create more housing with incentives to build affordable housing. Drafted primarily by Johnston town planner, Thomas Dellar, this type of out of the box thinking will give RI a legs up to address affordable home ownership. More to come and hopefully we will have some new houses under the works in 2024! "
Session just wrapped up and we were left with a whammy: as of September, you can no longer evict without a lead certificate. The lead law reads every unit must be inspected every two years regardless if you turn over a tenant or not. So, while this is pretty straightforward when you have a tenant turnover, what about those not so clean long term tenants that don’t like anyone in their unit? Or, the ones that changed a lock and got a dog? Keeping units safe for tenants is one of our pillars but it isn’t always a straightforward process. We walk through units twice a year to look for unsafe conditions like peeling paint. But, with our old housing stock, we have to count on tenants too to inform us if there is an unsafe condition and also be somewhat clean. For example, what if a tenant’s child had a tantrum and threw a hardball into the wall? Now, the older underlying layers of paint have been exposed and small particles of lead dust fell on the floor next to his baby brother’s toys. Baby brother comes over to watch his older brother try to hide this hole and unknowingly rolls his own toys back and forth through the lead dust. As older brother frets how to best hide the wall hole, baby brother starts mouthing his own toys (he is teething) and has ingested lead. It takes that little for a lead exposure to occur. A couple months is going to be tough for landlords and our 16 lead inspectors to get up to date.
The party is over, the hangover lingers. Neither buyers nor sellers are particularly happy in the moment. But, if we have any hope to preserve middle class home ownership, now is the time to stay on course. The inflationary spiral took the reality of home ownership away from many. Now, we look at high prices and high rates and even fewer can buy. But, the high rates have already slowed the pace of price increases and the rates will not remain high forever. Indeed, most expect some leveling off by end of the year although our newest financial bump in the form of bank failures has certainly made this trajectory less certain. I don’t doubt the resiliency and health of our economy. I worry our political leaders will lose sight of the fundamental need to create/ enable affordable home ownership. The middle class is the backbone of our society. Lack of affordable home ownership erodes the middle class and leads to a greater wealth gap. Ultimately, this is just bad for everyone with an overall reduction in American productivity and, perhaps, just as importantly happiness…. Buyers and sellers let’s deal with the pain now and hope it lessens a bigger problem.
Earlier this year, there was some confidence that long term mortgage rates may get below 6% by the end of the year. It seemed at this time the Fed found the magic formula to tame inflation while achieving that soft landing for the economy but stubborn inflation date followed with an uptick in mortgage rates. Now end of the year predictions are just a field in the high fives to low 7s depending who you ask. Many are fixed on the Fed’s next interest rate move after this week’s bank failures. A freeze in rate hikes would provide short term relief but be harmful in the long term as inflation is still sticky. The Fed’s uncharacteristically blunt message to date is there will be pain in the quest to calm inflation. Obviously, we feel that pain in the real estate world and SVB bank failure is another example. My guess is the fed will hold true to their message and at least do a .25 hike. And, I think that is a good sign for our economy: the fed has the right tools to steer out of a pandemic, handle bank failures, a war and supply chain issues without sending our economy into a tailspin. In the real estate world the giddy days are behind us but that’s a good thing in the big picture. We need more supply and affordable home ownership.
At this point, it is pretty safe to say the big crash isn’t happening. Interest rates have stabilized with some models showing the 30-year rate will dip into the 5% range by end of the year (bank rate, cnbc). Historically, this isn’t bad. Inventory still tends to be an issue but the days of crazy bidding wars are behind us. So, if you are a buyer what can you expect? The golden time to buy is elusive still but buyers can at least expect a mild reduction in sales price or an end to dizzy price hikes. It will be more pleasant to buy with less of a frenzy and proven practices like home inspections becoming a norm again. Is it smart to buy? Locally, high rents and lack of inventory can make buying a home instead of renting the best move. With today’s average rate of 6.8%, a mortgage payment on a $240k house is about $1600. When taxes and insurance are figured in that is going to be pretty comparable to what rent on a similar house would be. Answer is yes!
I am real interested to see what the spring real estate market brings us. Inventory still an issue. Rates are at least hovering somewhere in the 6% range which historically really isn’t that bad. But, in today’s market after years of head spinning price increases, the relatively higher rates still price many buyers out of the market, And, make potential sellers with lower rates are loathe to sell, further contributing to lack of inventory. Rents are just high and rental inventory is a big issue too. In over 20 years of business, I have never experienced such low vacancy rates for our own rentals. So, again, potential sellers will be reluctant: why trade in their low rate mortgage for high rent or a costly mortgage when there are still not even a lot of options out there to buy? In the least, the buying experience will be more pleasant: fewer bidding wars, waiving of inspections and above asking bids. So, if you need to buy, keep an eye on rate trends, as even a ¼ of a point matters, have some patience and have a good realtor by your side to find you a deal!
We find ourselves in a standoff between sellers who know inventory still isn’t what it should be and buyers who either can’t afford prices with increased rates or are waiting for the bargains to come. Even though sale price declines are happening, after the last two years of record increases, any adjustment is relatively mild and obliterated by high interest rates. Who is going to win this battle? The answer lies in the health of our economy and how severe any recession will be. Consumer spending is started to rack up on credit card debt as stubborn living costs remain high. But, on the other hand, the labor market is steady. If the Fed achieves this soft landing, real estate prices may just remain high albeit with the huge annual increases left in the past. Inventory will remain a problem: many will be loath to give up their historic low interest rates by selling, many won’t sell because they can’t afford to buy again, and builders have cut future development plans way back or stopped altogether.