2020 vs 2008
What is going on in the market? When are the foreclosure rates going to rise? These are but a few of the questions that we hear from our clients these days. Behind those and many other questions are real concerns that this may become like the financial crisis of 2008; sub-prime lending causes the stock market to crash, home values sink, and record unemployment. Now in 2020 we have a government imposed shut down of the economy, another crash of the stock market and rise in unemployment. Surely, the ship is sinking again, right? We do not think so and here is why.
When you turn to the facts and data you see a much different picture. But to be fair, its ugly out there and we are not going to sugar coat that. It is still unknown what path the virus will take and without a vaccine its anyone’s guess how long this will impact our lives. Housing data related to the pandemic is starting to be measured and according to the National Association of Realtors, we saw a drop in pending sales of 21%. Between the months of March and April we had 26 million people file for unemployment, mortgage delinquencies rose to 1.6 million and the federal budget deficit rose to 4 trillion dollars. Not a rosy picture but here is what’s different this time.
For a start the federal government, in true Texas Hold ‘Em style, went all-in immediately. In 2008 the government’s focus was primarily on saving the banks but this time they did not forget about small businesses and homeowners. The recently enacted Coronavirus Aid, Relief and Economic Security (CARES) Act provided immediate wage replacement, SBA Loans, Economic Injury Disaster Loans, and an additional unemployment insurance enhancement. The CARES Act also provided mortgage forbearance protection, a foreclosure and eviction freeze, as well as quantitative easing for mortgages and corporate debt. And the Federal Reserve lowered the federal interest rate to zero much sooner than they did in 2008. So, the reaction was swift, and the safety net was the largest ever thrown over an economy.
Another important difference to consider is the housing inventory. From 2000 to 2007 housing starts were above the historic average of 1.5 million per year, especially in the years of 2005 and 2006 homebuilding was going wild and way too many homes were being built. The result was a tremendous oversupply of homes on the market. Following the crash, housing starts dropped to below 500,000 units and has stayed below the historic average for well over a decade resulting in a housing shortage. Now, with the pandemic, we have an even greater shortage of homes on the market. Remember that 70% of Americans still have secure employment and as economic easing occurs and more sellers start to sell, the new inventory will stimulate the market rather than saturate the market. Further, sellers will become the next buyers as they move into new homes.
Mortgages in the financial crisis of 2008 were basically junk. Sub-prime mortgages flooded the market and many of these loans had variable rates that would set higher over time making them less affordable. The recent fall in new mortgage applications that began in mid-March, down 30%, began rebounding mid-April. The 10 Year Treasury note serves as a benchmark for the 30-yr fixed mortgage rate and as that has moved downward so have mortgage rates. Now, a 30-year fixed rate mortgage is around 3.3% and could go even lower as re-financing begins to slow down. So far, the data looks like the bottom of the drop is in April as the numbers are starting to move up again.
How people feel about the market is also important. The Consumer Confidence index is one data point for measurement and rating below 100 indicates a lack of confidence in the economy. April’s index was measured at 86.9, which is a six-year low but not as low as January of 2009 when it fell to 37.7. More specific to real estate, the National Association of Realtors surveys show that Sellers are remaining calm and see no signs of blood in the water. 88% of sellers anticipate getting their pre-pandemic asking price. Buyers on the other hand expect a discount however 50% of buyers see no change in home prices. 23% of buyers expect to get 5%-10% off the listed price, which was typical pre-pandemic. Those fearing the worst and expect a drop of more than 15% only make up 15% of buyers. Those who did not buy a home a few months ago because of multiple-offers and tight inventory may be more eager to snatch up what comes on the market this summer. So for this go-around, buyers looking for deep discounts and foreclosures may come up emptyhanded.
We remain bullish on the real estate market but if mayhem returns all bets are off. Until we have a vaccine or somehow this virus plays itself out it is impossible to foresee all the possible outcomes. Please follow the directives of the CDC and our Governor, Michelle Lujan Grisham, who we believe is doing a great job keeping New Mexicans safe. We all have an opinion about this but none of us bear the responsibility for our thoughts more than she does, especially those with bullhorns. It’s really not a big deal to wear a facemask and its embarrassing when some people act like you are asking they for a kidney.
There’s a lot of craziness out there so let’s stay calm and remember that we are all in this together. We hope that all our readers stay safe and let’s all do our part to avoid spreading the virus. On a final note, as economic easing increases, please support your local businesses. Amazon, Home Depot and Costco will be fine, but let’s get out and support our locally owned nurseries, restaurants, and retailers. They all need our help getting back on their feet. Till then, stay safe, stay well, and be strong.