It is impossible to calculate the global toll of COVID-19. Millions of infected individuals, hundreds of thousands of deaths, entire industries at a complete standstill – it is understandable to assume that even the lending industry and the real estate market have halted. However, the California real estate sector continues to move forward, as do we at Pacific Private Money Inc.
Open and Viable During Shelter-in-Place
Our company continues to experience strong loan demand. Many of the loan requests coming in today are a result of stalled or canceled loan commitments from lenders in the “Non-QM” lending space. Non-QM stands for Non-Qualified Mortgages, and these are loans for borrowers that don’t meet the Dodd-Frank mandated stricter Qualified Mortgage standard that banks and other conventional lenders mostly adhere to. Non-QM loans are typical for self-employed borrowers, real estate investors, and other borrowers who don’t have traditional W-2 income sources. In March, many Non-QM lenders were no longer able to close loans due to a freeze in their sources of capital.
As a result, we’re seeing many high-quality loan requests from borrowers who will qualify for better rate financing once the capital markets open up again. At Pacific Private Money, we feel very fortunate to be in a business sector that has the opportunity to remain open and viable during shelter-in-place.
A Resilient State Industry Overall
We have experienced a surprisingly manageable number of loan payment deferment requests. Roughly 10% of our 275 serviced loans have requested payment deferments. We’re analyzing each request separately, approving some while denying others. Given the amount of equity in these specific loans, we’re not presently concerned over the prospect of a loss of loan principal.
We’re also confident in our overall loan portfolio, primarily due to our belief that the California real estate market will not suffer a dramatic fall in values. This belief is supported by many industry experts. We continue to keep abreast of the real estate market through our industry connections, as well as monitoring various industry websites, blogs, and news consolidation services.
However, California may be unique in the resilience of its real estate market. Peter Lane Taylor, writing for Forbes in mid-April 2020, noted, “My wife and I listed our house for sale in late February, shortly before Washington State reported its first COVID-19-related deaths. We went under contract in less than 24 hours. Full ask. 30-day close. Everything was going exactly according to plan. Until the Dow cratered and it all fell apart.”
Taylor goes on to note that much of the US housing market is “on lockdown. New construction sales centers are empty. In most states, real estate agents can’t show houses. Inspectors won’t inspect. Appraisers can’t appraise. Even cash buyers willing to waive contingencies can’t get an appointment.”
He paints a bleak picture of the current situation. However, what about the future? That is something completely different. “Opinions and models run rampant on how fast the economy will reboot,” Taylor continues. “Few economists believe that we’re in for the brutal, elongated ‘U’ that America experienced through the Great Recession. Most predict a more rapid corona ‘V’, especially for manufacturing and retail, pointing to the speed with which businesses and factors have re-opened in China and South Korea.”
Taylor goes on to note that real estate-industry businesses are considered “non-essential” in most states, but despite that designation, “homes are still moving, even those with outsized price tags. Agents on their toes with willing buyers are adapting rapidly. And motivated sellers are still closing deals.”
This correlates well with the latest news from other sources in the industry. In an article this week in the subscription-based media service Inman, Fannie Mae chief economist Doug Duncan was quoted saying that their internal strategic research group thinks the average rate for a 30-year, fixed-rate mortgage will drop to 2.9% in 2021. Should this happen, this could set the stage for vibrant housing sales, price stabilization and possibly price appreciation next year.
That paints a very different picture to what many fear – that we’re in for a return to the aftermath of the Great Recession.
Corroborating the Forecast
Writing for Curbed, Jeff Andrews shares Taylor’s opinion that, while the real estate market might be slow at the moment, it’s far from down for the count. He writes “Academic and real estate consultant Mike DelPrete looked at new home listings data for five markets in varying stages of sheltering in place—New York City, Portland, Austin, Seattle, and California’s East Bay, which includes Oakland and Berkeley. He concludes that new home listings bottom out after just a week of sheltering in place, and stay at that bottom for 3 to 4 weeks before gradually starting to rise.
This suggests that the housing market recovery on a graph would be shaped like a checkmark—a sharp immediate decline to a bottom and then a slow recovery back to pre-pandemic levels. According to DelPrete, New York City is currently still at the bottom point, while Seattle, Austin, and the East Bay have started to move up in terms of new listings.
Pageview data from Zillow seems to support this general theory. When the pandemic hit, Zillow saw a 19 percent year-over-year drop in pageviews nationally on March 22. As of April 15, the seven-day trailing average for pageviews nationally was up year-over-year by 18 percent. This suggests the buyers and sellers are resuming their home search and will be ready to buy and sell again when quarantines lift.”
Overall, that’s a pretty bright picture he’s painting. Those are not his only points. In his article, Andrews goes on to note the following:
- Ralph McLaughlin (chief economist at Haus) forecasts that the pandemic will cause a sharp drop during the spring and a noticeable rebound in the summer.
- A possible second dip in the fall could occur as the second wave of COVID-19 impacts the country.
- A return to relative normalcy by spring 2021.
- Most home prices will fall by very little, if at all.
- The hardest-hit areas will see drops of 1% to 2.5%.
How is it that home prices are expected to fare so well, though? For that, we need to turn to information published by the California Association of Realtors.
CAR Weighs In
According to the California Association of Realtors, home prices will be protected by a couple of different factors. These include the following:
- “Mortgage Rates Will Likely Remain Low, Or Even Fall Further as a Result of Coronavirus: The Federal Reserve issued an emergency 50 basis point cut to their target interest rates, and guidance suggests that the Fed may be open to future reductions to counteract the negative impacts to financial markets. This should help to reduce the cost of borrowing and make housing more affordable over the near term, which should help to offset some of the negative impacts to housing demand associated with rising uncertainty.
- New Home Construction in California Could Slow Further, Exacerbating Already-Tight Supply: Many of the inputs to California’s Building Industry are sourced from Asian countries including China. As the Coronavirus disrupts these supply chains, the cost of those materials may increase over the short run or become limited, which will increase the cost of construction and potentially reduce the pace of new residential development below its already-lackluster pace in 2020.”
- Low Rates and Fewer New Homes Constructed Should Place Upward Pressure on Home Prices: Improved affordability stemming from lower rates combined with fewer new homes being constructed as the construction supply chain is impacted could lead to more upward pressure on home prices in California. Unsold inventory is already at low levels, and reduced construction activity means that is likely to continue—especially if buyers respond to lower rates.”
Further Support for Price Protection
In addition to the CAR, other industry veterans and leaders share the same opinion on the real estate industry. Not only are we not in store for a repeat of the Great Recession, but the already-fluid situation is expected to change very quickly for the positive. In an article entitled Is The US Hurtling Toward Another Housing Crash, both Realtor.com chief economist Danielle Hale and Robert Dietz, chief economist of the National Association of Home Builders weigh in.
“Most housing experts believe the wave of across-the-board home-price slashing and desperate sell-offs that characterized the aftermath of the Great Recession are far less likely to materialize this time around. Why will things be different? Because bad mortgages, rampant home flipping and speculation, and overbuilding all contributed to the last financial meltdown. This time around, the much-stronger housing market isn’t the driver of the crisis—it’s one of COVID-19’s many victims.
“There’s no way we get through this unscathed. But I don’t think the world will fall apart in the housing market the way it did in the last recession,” says Realtor.com’s chief economist, Danielle Hale. “We won’t see prices driven down out of necessity because people were forced to sell like before.”
In fact, the fundamentals of the housing market couldn’t be more different from the economic meltdown of 2007–09. In the lead-up to the Great Recession, it seemed like just about anyone could get a mortgage—or two or three. Today, only buyers deemed less of a risk can score a loan. Credit scores need to be higher, debt-to-income ratios need to be lower, and lenders verify incomes much more carefully.
Additionally, in the mid- to late-aughts, there was a vast oversupply of homes. So when the market crashed, there simply weren’t enough qualified buyers to purchase them. And with all of the foreclosures going up for sale, a result of bad loans, home prices plummeted.
But today, there’s a severe housing shortage that’s keeping prices high.
Prices are driven by the rules of supply and demand. On the supply side, there is a record-low inventory of homes on the market, as sellers have been steadily yanking them off. Many don’t want potentially infected strangers walking through their homes and want to wait for the economy to improve so they can fetch top dollar for their properties. Others don’t want their homes to linger on the market unsold during a time when fewer transactions are taking place.
Still, the demand for new homes hasn’t evaporated. There are simply too many would-be buyers out there: millennials eager to put down roots and start families, folks who lost their homes during the last recession and want to buy another property, and boomers looking to downsize.
“People need a place to live, and at some point, we’re going to get past the virus,” says Robert Dietz.
And while many potential buyers will grapple with job losses or the prospect of them, others will be lured in by the prospect of super-low mortgage interest rates. Rates were just 3.31% for 30-year fixed-rate loans as of the week ending April 16, according to Freddie Mac. “I don’t think we’ll see significant price cuts,” says Dietz. “There’s a lot of young people who want to attain homeownership.”
Other Important Insights to Understand
As you can see from the information above, the California real estate industry is more resilient than you might have supposed. However, there are some additional takeaways from industry leaders that should further inform your investment decisions.
For instance, while nationwide, home-buying demand has decreased 19% from pre-COVID-19 levels, it has increased every single week since the beginning of April. That trend is expected to continue, putting us back to pre-COVID levels very quickly, and even moving the market beyond that point, as buyers and sellers leery of the market variations surge to get in on the action.
Another important note is that one-fifth of all sellers feel that now is not the time to put their properties on the market. That automatically leads to a housing shortfall. In markets like California, where inventory has been limited anyway, it could drive prices up considerably, despite the dampening effects of the pandemic.
Across the country, median prices are rising, although the pace varies from reach to region. Combined with mortgage rates at historic levels and larger down payment requirements, more and more borrowers find themselves in difficult situations when finding financing in the first place. This is particularly true for low-income buyers and first-time homebuyers.
Additionally, Freddie Mac weighed in on the situation citing some familiar facts. “The fiscal stimulus provided by the CARES Act will mute the impact that the economic shock has on house prices. Additionally, forbearance and foreclosure mitigation programs will limit the fire sale contagion effect on house prices. We forecast house prices to fall 0.5 percentage points over the next four quarters. Two forces prevent a collapse in house prices. First, as we indicated in our earlier research report, US housing markets face a large supply deficit. Second, population growth and pent up household formations provide a tailwind to housing demand. Price growth accelerates back towards a long-run trend of between 2 and 3% per year.”
What It Means for Investors
COVID-19’s impact on the stock market might make it seem like the smart decision is to hold onto your investment capital. After all, no growth is preferable to total loss, right? While many other industries might not be ripe for investment right now, the real estate industry, particularly in California, remains robust and capable of delivering substantial returns even during shelter-in-place. And, with the pronounced “V” that most experts are predicting, there will be fast acceleration coming out the other side of the pandemic.
So, what does that mean for potential investors? Simply put, now’s the time to put your money to work on your behalf. At Pacific Private Money Inc., we offer multiple ways to do that. The Pacific Private Money Fund is perhaps the simplest option and allows you to achieve benefits that aren’t possible with individual notes. However, different risk/reward appetites demand options, and we can also help you invest through factional loans or whole loans. We can also offer a simplified, streamlined solution for trust deed investing that offers reliability, transparency, and personalization.
Yes, the pandemic is frightening. Its impact is very real, both on human lives and on the economy. However, things are not as bleak as they seem. Together, we’re sheltering in place to prevent a worst-case scenario from occurring. Together, we’ll also blunt the economic fallout. And, with the resilience of California’s real estate market, the growing demand for housing, and the increasing shortfall of available properties, investing now could be a smart decision for many.