By Charles Sells
When the nation locked down in mid-March of this year, most people went on with their daily lives to the best of their abilities. Those who could work remotely did so. Those who could take out loans or obtain grants to support their families and businesses “until this is over” did so. Those who were stuck at home and out of work tried to make the best of it by taking long walks and binging season after season of television they had missed back when they were working. Everyone focused on the end goal: getting back to normal.
Now, however, more than four months into the U.S. coronavirus pandemic, “back to normal” feels farther away than ever. In fact, some medical experts and economic analysts have found they can agree on at least one thing: “Back to normal” may be gone for good. If that is the case, then real estate investors are in the best position of any investor when it comes to making the most of whatever the new normal actually looks like.
Here are four housing predictions that show just how unusual the “new normal” in real estate could be:
VA, FHA & USDA Loans Won’t Have the Flexibility They Used to Have.
According to Homelight.com, lenders offering USDA, FHA, and VA loans will likely no longer work with borrowers with low credit scores. In the past, these applicants were considered deserving of extra flexibility, but now lenders are raising the minimum score on these historically “easily accessed” loans by 100 points or more in addition to requiring down payments between 10 and 20 percent. Not all lenders are currently doing this, but the trend is likely to continue as the contagion continues into the fall. This will dramatically alter some investors’ strategies for exiting deals since it removes a large portion of their potential buying population from the equation as long as these loans come with such stringent standards.
Note: This type of adjustment, particularly to VA loans, may not withstand public scrutiny and criticism.
Foreclosure Moratoriums Could Bankrupt Mortgage Servicers.
Thanks to state and federal moratoriums on foreclosures and evictions, Curbed analysts predicted in April that protective measures like these could have the “unintended consequence of bankrupting mortgage servicers suddenly on the hook for missing mortgage payments.” In this event, another financial crash could be imminent, warned Patrick Boyaggi, CEO of mortgage marketplace Own Up. “I think what’s scary about it is what the last recession crisis taught us is just how intertwined so much of financial markets are,” he said. “You don’t just see something like this happen and there not be a ripple effect throughout the economy.”
Note: Mortgage delinquencies do not get banks and lenders who service the mortgages “off the hook” to investors. Although there could be some sort of moratorium or grace period for servicers as well, the farther down the line you go, the bigger the debt and the fallout become. For example, imagine if Citibank, JPMorgan Chase, and Wells Fargo all collapsed due to owing so much money on mortgages they service. The effects are nearly unimaginable.
Economists Might Stop Using Home Prices as an Economic Indicator.
Historically, economists have used housing prices and housing affordability as powerful economic indicators to help them evaluate the overall health of an economy. However, the coronavirus pandemic has created a situation in which housing prices may continue to rise even as the economy founders. This could throw the traditional use of pricing and affordability completely “out of whack” because American consumers’ priorities have shifted during the lockdowns. For example, noted Brookings Institution experts in mid-May, median wages appear to be rising across the country right now, but that is because low-wage earners are nearly universally out of work outside of a few “essential” sectors. This could affect a vast array of housing data metrics as well.
Note: There has been a lot of industry “buzz” about how the COVID-19 pandemic is “the next big opportunity” in real estate. Although there are opportunities to help homeowners and shore up your portfolio, beware of entering new markets just because things look like they could be selling at “bargain basement” prices. The new “rules” for investment strategy and analysis mean you need expert insight on that specific market before you place capital there.
A “False Restart” on the Economy Will Tank the Housing Market.
According to this theory, home prices might fall by as much as 3 or 4 percent this fall when Americans who were considering selling their homes take them off the market in the face of a new wave of infections. Zillow analysts recently released a series of increasingly pessimistic economic predictions indicating what a sunny outlook, a “medium view,” and a “pessimistic forecast” would entail. In the “sunny” version, sales volumes fall but make it back almost to baseline of Q4 2019 by the end of Q4 2020. The medium forecast worries that home prices might fall between 2 and 3 percent and then stay there, and the most pessimistic indicates home prices would fall 3-4 percent and then remain low throughout 2021.
Note: These “phased projections” are interesting and may serve a unique purpose in the coronavirus economy since different markets and regions are reacting to the pandemic in different ways. Applying a gradient-based approach to investment strategy could be a great way to try to figure out how to invest with flexibility but also create the greatest degree of reliability possible.
Source Your Data Like You Source Your Deals
Whether you believe that these “extreme” scenarios are likely or not, the reality of real estate investors’ situation today is that we, like most people, have little real information about what the future will bring. However, as always, we do know one thing: people have to live somewhere. As has always been the case, the absolute necessity for shelter will serve as the catalyst for the real estate market and will likely push a housing recovery toward the front of the overall economic recovery in the next 12-24 months.
That being said, the recovery will be uneven, governed in large part by states’ ability to contain infection without killing the state economy. Some areas of the country blessed with the “right climate” for killing off coronavirus naturally (possibly by UV rays or temperature changes) could benefit from geography in new ways. Some areas of the country previously untouchable when it came to market fluctuations may suffer their first cataclysmic downturn in recent history.
The only way to really have a chance at making accurate predictions about the future of any given investment is to carefully evaluate not only where our information is coming from but how the source is obtaining its data. Furthermore, investors need to evaluate the data provider’s end goal. For example, Zillow has a vested interest in providing lots of interesting projections and forecasts that will keep people coming back to the Zillow website and keep it at the forefront of the American mind. However, it does not necessarily have a vested interest in providing you, a real estate investor, with a lot of rigorously tested theories because Zillow is in the business of real estate data, readership, and home values rather than in accurate economic forecasting.
On the other hand, there are plenty of reliable, “hard-core” data providers and analysts out there whose livelihood depends on their ability to provide investors with solid data and make relatively reliable observations and forecasts based on that data. Those companies may provide better long-term information for a real estate investor even though their predictions may not make headlines or be as flashy.
Learn more about how PIP Group is evaluating markets and deals in today’s pandemic economy by visiting PIPGroup.com.