Spring is usually a time for the market to take a turn for the better and we see sales and listings grow. This year we are experiencing something that could shape our futures as we know it. COVID-19 or Corona Virus has taken over not just the US but the WORLD and the Market is changing with it. In this past weeks Real Estate With Ryan we discussed the virus and how it is effecting our every day lives as well as businesses, real estate and more!
Potential Impact of Corona Virus on the Housing Market
Some of you might remember the H1N1 swine flu virus from 2009. The housing market was initially buffered from the hit of the virus outbreak, but the economic slowdown eventually had a visible correlated impact on the housing market. Key metrics were effected such as home sales, home prices, and inventory. This lasted for about 24 months after the virus hit its peak. But keep in mind that we were all still recovering from the big crash of 2008 as well. The market coming into 2020 was very strong and the stock market was at an all time high. We were hitting records locally as well as nationally with a positive outlook on what was to come.
Prior to the spring of 2009, most economic indicators were moving upward toward recovery, but most quickly changed trajectory.
- In May 2009, Household Income dropped mid single digits, just a month after the virus onset.
- This was followed by Home Purchase Plans reaching a 20 year low in December 2009, 8 months after virus onset and 2 months after virus peak. This lasted for another 8 months. Declining sentiment around this time was also attributed to the end of the homebuyer tax credit, which started in July 2008 and ended in November 2009 (with a later extension into July 2010).
- The consumer confidence index (CCI) decelerated thereafter, and dropped below 50 in September 2010, 17 months after virus onset and 11 months after virus peak.
With some lag, key housing indicators reacted to the weaker economy, and showed signs of softness in the market. While there is a clear sequence and association with the swine flu virus, it can only be thought of one of many factors affecting housing during the period, including the aforementioned end of the homebuyer tax credit.
- Existing home sales dropped double digits, 15 months after onset, and 9 months after virus peak. That lasted 5 months.
- In close succession, inventory growth accelerated and grew double digits in Aug 2010, 16 months after onset, and 10 months after virus peak. That lasted 6 months.
- From there, growth in sale prices stalled and declined by mid single digits in Feb 2011, 22 months after onset, and 16 months after virus peak. That lasted 11 months.
CCI dropped below 50 again during that time frame, and lasted 3 months. In tandem, household income stalled again in May 2011, failing to grow beyond 1.0 percent for 10 months.
Potential implications of COVID-19 for 2020 economic and housing landscape
In sharp contrast with H1N1, COVID-19 comes at a time of contraction, after years of frantic expansion, with an economy on a slowing trajectory. Job creation, GDP, and consumer confidence are all decelerating but still at historically strong levels. The coronavirus also hits a housing market operating at post-peak after record level home sales and prices, but now struggling to rebuild supply amidst years of insatiable demand.
Through the lens of the last outbreak, the prevailing coronavirus has the potential to accelerate economic corrections and, with some lag, contribute to sharper but temporary drags on housing activity. However, if the virus threat remains relatively contained and within the boundaries of a short-lived pandemic, housing activity is likely to follow its current decelerating yet controlled trajectory.
As early coronavirus impact scenarios continue to emerge, most analyst estimates project a national GDP drop in the range of 0.25-1.0 percent, with 6-24 month impact periods. While better data of the virus spread and the market implications will surface in the next few weeks, a 0.5 percent GDP drop appears more probable at this point, with the impact likely extending at least one year. If all other variables stay the same, the impact to housing could be palpable and momentarily disruptive, but less likely to be long-lasting at a national level.
In the short term (the next 3-12 months), the combined effect of lower rates and low inventory should continue to power purchase interest and sustain upward pressure on home prices. As such, housing sentiment could remain strong despite initial shocks to the stock market and even moderate GDP declines. However, inventory woes though could mean no significant movement to home sales.
In the mid-term (the next 12-24 months), weaker economic conditions and slower growth in employment, income, wages, and GDP could come faster than anticipated and begin to act as counterweight to housing demand. The effect could begin to place downward pressure on the financial components of consumer sentiment, and help bring them down closer to 20-year averages. Growing demographics entering prime home buying years will ensure demand remains robust well through the middle of the decade.
Federal Reserve Cutting Rates
With the Federal Reserve cutting interest rates to near-zero, some consumers may have gotten the idea that mortgage rates are heading there, too. But that’s just not the case, though mortgage rates remain near historic lows, making a new mortgage or refinancing attractive for many.
In response to the coronavirus, the Fed cut rates over the weekend, dropping the fed funds rate one full percentage point to a range of 0-0.25 percent, the largest emergency reduction in the bank’s more than 100 years of existence. Investors’ expectations of a rate cut as well as the actual cut helped drive the 10-year Treasury note below 1 percent. The 10-year note is key, because it’s a benchmark for 30-year mortgage rates, and often the two move in similar directions.
You can think of the 30-year mortgage rate as a combination of the 10-year Treasury rate plus an additional markup called a spread. That spread makes it worthwhile for the bank to lend the money, covering the bank’s operating costs and generating a profit. Without a spread over its own cost of funds, a lender could not continue to operate and fund loans.
And that’s why mortgage rates are consistently well above the rate on the 10-year note. Typically the spread is around 1.8 percentage points or so, say experts, but that can and does change with market conditions. The chart below shows mortgage rates and the 10-year note over the last year as well as the spread between the two. Note how the spread has actually risen as the 10-year fell.
The 10-year has dropped substantially in the last month, while 30-year mortgage rates have fallen, too, but not as much. The net difference – the spread – has actually widened in that timeframe, as you can see with the upward climbing line in the graphic. The spread now sits at 2.54 percent. In periods where the 10-year notes dips a lot, the spread may climb somewhat.
So while the Fed lowers rates to zero, putting downward pressure on mortgage rates, potential borrowers shouldn’t expect their borrowing costs to move toward “free money” any time soon.
Where are mortgage rates now?
Bankrate just released its latest weekly average mortgage rates, and the results show rates have actually climbed over the last couple weeks, even as the 10-year Treasury yield has mostly fallen. The average 30-year rate in Bankrate’s survey rose 11 basis points to 3.88 percent this week, after moving up 19 basis points the previous week.
What’s driving that shift higher when other rates are actually falling? One reason is that low rates have encouraged a massive wave of refinancing, including cash-out refinances, which are at an 11-year high. That spike in popularity has overwhelmed the ability of banks to keep up. So in some cases lenders are actually raising their rates to make it more profitable. Others raise rates to discourage new business because their underwriters are too busy.
In still other cases, loan originators are overwhelmed by the volatility of the market and need to raise their own rates in order to ensure that the loan remains profitable for them.
Still, now remains a good time for many borrowers – millions, actually – to refinance their mortgage and reduce their monthly costs, especially as some economic uncertainty looms.
How Is The Government Helping
Congress has passed the Families First Coronavirus Response Act (H.R. 6201) providing support to American workers, families, and businesses, including the expansion of paid sick leave and family medical leave. It also includes refundable tax credits for small businesses and self-employed individuals to cover the cost of the leave.
NAR’s advocacy team continues to urge Congressional leaders to include support for self-employed professionals and other small business owners. This was included in the final bill.
Family Medical Leave Expansion
- Allows up to 12 weeks of certain virus-related family medical leave at pay of at least 2/3 of regular pay through the end of 2020 (however, employees must use vacation days, personal leave, or unpaid time off for first two weeks)
- Covers employees at businesses with fewer than 500 employees
- Eligible employees are those not working because the employee is caring for their child due to school or child care closure or unavailability due to a public health emergency
- Provides a refundable tax credit for eligible self-employed individuals equal to their qualified family leave equivalent
- Provides employers with a refundable tax credit equal to certain family leave wages paid to employees
- The Secretary of Labor has the authority to issue regulations exempting small businesses with fewer than 50 employees on financial hardship grounds
Paid Sick Leave Expansion
- Allows two weeks of paid sick leave through the end of 2020 (80 hours for full-time employees; pro-rata rules for part-time employees)
- Eligible employees are those not working because of quarantine, symptomatic, caring for an individual quarantined or a child due to school or child care provider closed, or for experiencing a similar condition specified by the Secretary of Health and Human Services
- Covers employees at businesses with fewer than 500 employees
- Provides a refundable tax credit for eligible self-employed individuals equal to their qualified sick leave equivalent
- Provides employers with a refundable tax credit equal to certain paid sick leave wages paid to employees
- The Secretary of Labor has the authority to issue regulations exempting small businesses with fewer than 50 employees on financial hardship grounds
Medicare, Medicaid, Health Insurance and Unemployment Changes
- Requires insurers, Medicare, Medicaid, and other federal health programs to fully cover testing and related services for COVID-19, without cost-sharing
- Increases funding to Medicaid to help cover uninsured populations
- Provides additional funds for certain programs aiding elderly Americans
- Increases funding for emergency transfers to state unemployment programs and increased flexibility for states to modify unemployment policies based on effects of COVID-19, such as waived work search requirements.
About the Tax Credits
Refundable tax credits are considered especially generous since any amount above taxes due is paid in the form of a refund. The payroll tax credit provided to employers will provide cash to them relatively quickly as it is creditable against their portion of an employee’s Social Security tax liability, which is generally due monthly or semi-weekly. And since most self-employed persons are required to pay quarterly estimated tax payments, they will not have to wait until the end of the tax year to see the cash.
A Final Note
Many of the tax credits and benefits mentioned above have limits and/or qualifications, so we encourage you to explore NAR’s comprehensive briefing document for more details.
This bill mainly addresses employment issues–NAR’s advocacy team expects legislation targeting the overall economy to come later.
Small business owners and the self-employed are crucial to the growth and stability of the national economy and also face disproportionate burdens if they are forced to shut down, temporarily lose employees, or see their customer base drop.
They deserve equal access to emergency funding and programs, and we will continue to engage with Congress as this public health emergency unfolds.
