Forbesby Erik Sherman
April 28, 2020
If you are a homeowner who doesn’t remember the battering property prices took during the Great Recession, there's a good chance you're about to get the same experience.
Maintaining a housing market when business has largely stopped, a fifth of workers are idle, and money is being ladled out faster than a sodden sailor bails out a swamped boat is no easy feat. Prices have a good chance of dropping while people may find paying the mortgage harder than ever before.
Now is the time to review your situation, make plans, and be ready for what might happen.
Experts vary in what they expect from the pandemic shakeup. On the more optimistic side is Gregory Daco, chief U.S. economist for Oxford Economics USA: "Home price growth will undoubtedly slow and perhaps even contract by Q3, but the conditions are very different from the [Great Recession." He expects tight inventories, reduced leverage, and policy backstops to "limit the downside."
"Across the U.S. there is less than a six-month inventory of homes for sale [which] means there is an undersupply," said Kevin Martini, senior mortgage strategist at Martini Mortgage Group at Benchmark Mortgage. "This demand for housing is not going away and the supply for homes will remain tight post-pandemic since the population numbers are growing and household formations will steadily rise into the future because of the high birth rates in the 1980s."
Peggy Zabakolas, a real estate broker at Nest Seekers International expects some fall in prices, but not to the extent of 2008 due to "stricter underwriting rules in the last decade." Some other brokers—Gregg Menell, managing broker at Pendulum Property Group, which focused on Westchester Country in New York State, and Seth Lejeune, a short sale and foreclosure specialist at RE/MAX HOMEPOINT in the greater Philadelphia region—say that their areas are likely safe because of local economic conditions.
"A market like mine is fairly affluent and diversified so there are lots of buyers with the money to afford housing," Lejeune said. "My worry is for those areas of the country which rely on maybe a few businesses to support the entire community." A lack of economic diversity could hit hard.
Then there's the skeptical wing.
"I think there is a 100% chance for a downturn in the real estate market," said Craig Kirsner, president of Stuart Estate Planning Wealth Management. He sees real estate markets as "more overvalued than in the 2007 housing bubble," with growing student loan and consumer debt adding financial pressure on people. Even before the virus landed and spread in the U.S., household debt hit a 14-year high in the fourth quarter of 2019, according to the Federal Reserve Bank of New York. As things freeze up, with many people losing work, the ratio is bound to jump, as there's less money to pay debt down and more need by many for credit.
Then there is the gloomier view. "Housing prices are likely to suffer their second bear market of this century with a similar percentage decline as 2006 to 2011, when the average nationwide drop was 34% to 35%," said Steven Jon Kaplan, CEO of True Contrarian Investments. While many economists say that the lack of subprime mortgages are a protection, they overlook "that housing prices in many neighborhoods in California and some other places were 8- to 10-times the average household income earlier this year versus a long-term average of 3 to 1."
Plus, the assumption of healthy demand for homes at the same time as low inventory may be overly optimistic. Kirsner points to baby boomers—10,000 turning 65 every day for the next 10 years, as he noted—who are and will continue to downsize their homes, adding to inventory while many younger people are too saddled with debt to buy a home.
"Already we are seeing listing prices drop and folks pulling their listings," said Clint Edgington, a partner at Beacon Hill Investment Advisory, which is active in purchasing vacant properties. "With a decline in pricing and increasing unemployment, more homeowners will find themselves underwater."
What To Do
With all the economic decline that's now visible—even if data from metrics haven't yet caught up—it seems safe to expect many homeowners in this country will experience a loss in property value, potentially combined with household job loss and a tightening of the general economy.
I spoke with Greg McBride, chief financial analyst at Bankrate.com, about what might be coming, and which steps homeowners could consider. The first is to take reasonable stock of where things are. Falling prices and even having an underwater mortgage may not matter if your job is secure and you have no intention of selling your house soon.
"I'd argue that most people are better served remaining more liquid rather than less liquid," McBride said. "Rather than pouring your cash into knocking down a mortgage balance, keep liquid. Money in the bank will pay the bills. Home equity will not."
For the many who may not have the luxury of waiting out the markets, here are some options:
· Mortgage rates are at historical lows. If you are paying more than market rates on your mortgage, consider refinancing. That isn't free, whether you pay fees in cash or in the form of a somewhat higher interest rate or total costs. But if you are tight on cash and refinancing doesn't result in a higher loan-to-home value ratio, it might make sense to lock in the lower rate, decrease your monthly payment, and free cash to keep as a buffer.
· If you have a lot of equity but little overall liquidity, consider a home equity line of credit or even a cash-out refinancing, "although terms have tightened up in that area, " McBride said. This may be best if you have a loan-to-home value ratio of significantly under 80%.
· "If your mortgage is close to the threshold between jumbo and conforming—$510,400 in most markets and $765,000 in higher-cost markets—you could benefit from refinancing from a jumbo mortgage to not only a lower rate but a federally-backed mortgage," with some additional payment relief options, McBride said.
· If things are particularly bad, see what strategies might be available to you. The Federal Housing Finance Agency has suspended for at least 60 days foreclosures and evictions for mortgages backed by Fannie Mae and Freddie Mac. Forbearance will be available, allowing a suspension of payments for up to 12 months due to pandemic-caused hardship. The amount can be tacked onto the end of the mortgage. But other types of mortgages, even if offering forbearance, may not have the option to push the missed payments off to the end of the mortgage period, in which case you may have to make up all missed payments at once.
Everyone's situation is different. Read through all your documents, do some planning, speak with a financial advisor, and see what your options are. But do this soon because if things start falling apart, you want to be ready in advance rather than scrambling after.
|Peggy Zabakolas Esq
Licensed Associate Real Estate Broker as "Panagiota, Zabakolas"