If you are lucky you had placed your down-payment fund in a safe cash or similar option and thus have been immune to the downdraft in the equities market. Should you proceed?
At present the housing market does not seem to have been impacted. However, consider this; stocks have fallen into bear market territory and some suggest additional downdrafts, major industries are on pause and small businesses, the backbone of our economy are being decimated. As of this writing we still do not have a Federal Stimulus Package passed and even if it passes it is a short-term infusion of capital into unchartered waters.
Hare some tenets of the market:
- Everyone needs someplace to live.
- For Sale housing stock is usually more attractive than the rental options available.
- The majority of inventory on the market and pending are sellers who are moving up or on.
About 2008, at this point that crisis was different. Yes, the S&P 500 lost half its value and housing values cratered; in many markets down more than 40% from their peaks. Yet from 2000 to 2008 we also experienced a glut of sub-prime mortgages provided to risky borrowers, appraisals that were out of alignment with the actual market and the belief that housing values can only go one-direction being up.
The years between 2008 and 2012 were a wake-up call and while memories are short, I believe our lending standards are much more stringent, there is less overall speculation in the housing market, negative equity loans are almost non-existent i.e. 125% loan to value, and while collateralized debt obligation (CDO) are still in the marketplace the low interest rates from mortgages have tamed their demand.
So, what to expect in 2020 and beyond?
- Inventory is still challenged in the most in-demand urban areas.
- Interest rates continue to hover at historically low rates.
- Prices had been stabilizing prior to the Covid-19 outbreak.
So, what are the headwinds we are about to encounter?
- For those whose down-payment is in equities and/or in a retirement account they may have to sit on the sidelines for the foreseeable future due to the downdraft in the equities market.
- For sale inventory will most likely increase due to job losses and relocation concerning employment opportunities in turn may be beneficial to landlords.
- Psychological concerns related to housing values i.e. if the economy is moving into a recession, housing may not be far behind.
- On a micro level, limited showing opportunities, inspectors and appraisers not willing to enter homes, multi-unit building restricting access all of the prior due to Covid-19 virus concerns.
- Lenders inundated with refinancing activity in lieu of new purchase loans.
So, what should one do i.e. sit on the side-lines or is this a period of opportunity as we witnessed in 2010/11 when the housing market started to show green shoots?
Assuming your down-payment funding is secure and available:
- Location, Location, Location: This is still one of the most important considerations AKA Supply and Demand. During the recent up-market houses that would have languished on the market due to challenges i.e. on busy roadways, demanding structural renovations and so forth were selling due to inflated demand and limited supply. I believe those homes will be the first to be challenged in this market. Thus, consider the longer-term value and potential equity appreciation versus immediate price adjustment.
- Income Stability: If your employment and income stable? If a couple do you need both paychecks to quality for a loan and cover the monthly PITI? Even if you qualify for a mortgage and the PITI is lower than rent one must consider residences are NOT LIQUID. If you have to relocate for an employment opportunity one cannot immediately divest and even if considering renting the residence your mortgage may not allow it AND you may not qualify for another mortgage to purchase where you plan to relocate.
- Longer-Term Ownership: Between 2012 and 2017 in many markets’ buyers could literally secure added equity post-closing due to demand. As readers of my blog know I have showcased many residences that were purchased and sold within 2-3 years for a monetary loss.
So, what to do?
- I Love It: If you find a residence you truly love to go for it. My rule of thumb, regardless of price would you buy it? Now is not that time to consider “if we do this or that” I could learn to love it. Remember 25% of homebuyers regret their purchase.
- FOMO: Disregard the Fear of Missing Out. The reality is a purchase of a residence is most likely the largest investment and debt you will incur in your lifetime, thus proceed with caution.
- Think Long Term: As mentioned above beyond a longer ownership period consider other tangibles i.e. Will the home work for us in 5-7 years? Is the school district in demand? Are values in the neighborhood stable? What is the future concerning zoning, inventory, development, regional employment and so forth? Not every neighborhood is Washington Park i.e. long-term demand and stability.
- Secure the Services of an Experienced Real Estate Broker: For many inexperienced brokers we are treading uncertain waters. Many brokers have not experienced a market that has plateaued or heading down. Others may not have experience concerning adding contingencies to allow the buyer to delay or cancel the purchase due to unknown externalities.
- Final Suggestion: If you are securing a mortgage in Colorado, we have The Loan Approval Contingency; my suggestion push out as long as possible and make the deadline the day prior to closing if agreeable to seller to provide you a penalty free out of the contract if needed.
Finally good luck and I am available for individual consultation as I too am practicing social distancing at Joseph.Sobin@EVRealEstate.com