Coronavirus and the Housing Market: Part I

After attempting to get this information out several times and trying to find a balance of helpful information that is not overwhelming and boring, we have decided to run a 2-part series reflecting upon the state of the overall housing market in Part I and what to expect from a transaction in Part II.  At Guidant Realty, we are blessed to be involved in state and local Association leadership, state legislative lobbying, and local MLS leadership which grants us the opportunity to receive the most current and correct information.  There is much to share in this environment that is too detailed to put in a common article.  If you have questions, do not hesitate to contact us.  On the flip side for those that don’t want to read an entire article and just want the punch-line, here it is: the California housing market is stable, only less homes being sold overall, and a temporary buying opportunity is emerging…

While it feels interminable and unchanging for many stuck at home, things have been evolving rapidly behind the scenes for real estate companies in California: not on the essential list, on the essential list, no open houses, don't show houses that have people living in them, do show houses with people living in them with proper procedures, still no open houses, obtain written agreement from Buyers to follow specific showing procedures, disinfect between every showing according to unrealistic OSHA rules, post notices at the door for showings, still no open houses...however, the reality is that real estate transactions continue even in this environment and we are not seeing signs of a melt-down.

As a quick history lesson, real estate has been on the Federal CISA "essential" list since March 28 and the State of California has mirrored that list.  However, many counties created their own "Shelter in Place" orders that added limitations to varying degrees or outright bans on real estate transactions.  Most real estate companies work across several county boundaries and tracking those differences to remain legal in this environment has been quite an effort.  During the early days of the pandemic, the California Association of Realtors (C.A.R.) was quick to publish suggested best practices to keep appropriate safeguards in place and to show government officials that this industry could keep moving forward - differently, but responsibly.  Recently, most of the counties have coalesced around a common understanding and are now deferring to the State of California in this business segment which has leveraged many of those best practices as the current rule-set to conduct transactions.  The good news is this brings more certainty to the market and acts as a stabilizing hand.  The bad news is finding a quality agent is more important than ever.  For the detail-oriented reader, those best practices can be viewed by the general public online at: https://www.carcovidupdates.org/best-practices-guidelines?src=redalert

All of this has occurred as we enter the traditional “selling season” of real estate, but there are several factors to consider.  Many that do not have a pressing need to buy or sell are simply waiting for more normalcy to return at a national level before moving forward.  Some buyers have found it necessary to live off of their down payment or no longer qualify due to higher lending credit score requirements.  Some current homeowners that may have been considering a sell-to-buy scenario have taken mortgage forbearances that will disqualify them from a new or refinance loan for 12 months – and many of these folks are unaware of that consequence.   The jumbo loan and construction loan markets have almost completely disappeared.  The recent imposition of rent cap regulations coupled with the inability to evict non-paying tenants is causing many current smaller landlords reconsider keeping their residential rental properties.  Many noteworthy industry professionals are forecasting a resultant overall price decline that is making some take the mental leap to images of the ’08-’10 melt-down.   On the surface, it seems like a complete mess.

However, the actual numbers are quite a bit more comforting and tell a different story.  Unlike what you see in the headlines, we are not selling ad space here, so there is no impetus to sensationalize reality.  That reality reflects transaction volumes which are down across the state in the 37% - 43% range during this period while prices are still moving up:

    

We have lost a few more buyers than sellers but not highly out-of-balance.  While inventory is rising, even after the rise, today’s inventory levels have only gotten us back to where we were a year ago this month which was historically extremely low.  At 2.1 months-of-supply locally, we are still firmly in a Seller’s market ("balanced" is 3 - 6 months of inventory).  This particular metric is the best overall representation to track in our industry and is automatically updated along with others on our website at: https://www.guidantrealty.com/pages/12482055/Market_Conditions.aspx.

Pending and closed sales have not just levelled off, but started increasing after previous declines.  The author’s prediction is that absent any additional disruptions we will move, temporarily, into a traditional balanced market for the next year and gradually slip back into a Seller’s market some time in 2021.  Strict underwriting guidelines of the last decade have eliminated the house-of-cards that previously collapsed the overall housing market.  A market balance has remained, in good part because interest rates are also unbelievably low in the high 2’s and low 3% range for a 30-year fixed mortgage and expected to remain so for most, if not all of the rest of the year.  Another market fundamental that has not changed is that there is simply not enough housing in California for its population.  Any flight from home purchases will only make the rental market tighter, driving up rents, and pushing people back to purchases as the cost to own diminishes in relation to the cost to rent.  However, one factor to watch is how high the unemployment rate remains after a full return to work as this would affect overall ability to pay.  With California's pre-pandemic extremely tight labor market, the expectation is this will not remain a long-term driving factor.

The bottom line is that there seems to be a forecast of a 3% - 10% decline in housing prices during this period.  Volatile low-volume markets like San Francisco are likely to see a bigger short-term drop while traditional high-volume “bread-and-butter” markets such as Sacramento and Los Angeles will likely be less-affected.  While the opportunity in deciding to “pull the trigger” always seems clear in hindsight, it is difficult to actually make that call when being barraged by a constant deluge of “sky is falling” media – especially when it will only get worse in a Presidential election year.  For those that wish or need to sell, there is still a reasonable market to do so and a variety of reasons why this still might be the best time.  For the smart buyer, there will be an environment with a temporary combination of fewer price wars, higher selection (that is California relatively speaking), and basement-level interest rates.  It’s a rare California housing opportunity and unfortunately, by the time most figure that out, the opportunity will have passed.  For those that see it and want to take advantage, I pose a question to you:  Can you see yourself sheltering in place in this home? 


* Note: Guidant Realty's broker, John Hughes, was directly involved with the Supervisors, Administrators, and/or Health Officers of 3 local counties that subsequently revised their real estate guidance.