By Mike Rains, Mar 25 2020 11:02PM
The Covid-19 virus has our country gripped in a crisis that we haven’t seen since the great recession of 2008. While the concern and fear about the future have much similarity between the two, there are many things different about today’s crisis. 2008 was a real estate crisis, not a health crisis. The fundamentals of the two real estate markets are very different indeed.
The 2008 market was a house of cards built upon poor real estate fundamentals. Home builders were building excess inventory at a clip of 2 million homes built annually creating excess inventory. Easy money loans were the norm; with no money down; no income documentation loans; pick a payment loans offering payments below an interest only loan payment were being used by everyday people not investors, and being underwritten to qualify at the lowest payment option, to name a few of the many poor fundamentals in place. When the cards started to fall, there was no strong foundation to keep it from falling down, and the first people that walked away, had nothing to lose but their credit, and they walked, and so on and so forth. The last people out were the ones who had a strong down-payment, but one or both spouses lost jobs, and despite burning through savings and possibly 401k monies to try and save the home, they still lost it.
Today’s fundamentals are very different, and when I talk about fundamentals I am talking about the economy, jobs, wage growth, supply of homes, demand for homes, and interest rates. As of February 29th, 2020 the real estate fundamentals were this for the Orange County California area: 1) lower inventory by 53% over 2019 available for sale 2) interest rate for a 30 year fixed rate averaged 3.25% 3) expected market time to sell was 35 days, (down from 65 days from 2019), for homes under $1 million which made up half of the inventory available and 76% of the demand of what buyers were searching for 4) There were 25% more home sales January 2020 than January 2019 5) Job numbers reported as of March 6th 2020 for February were up 273,000 for non-farm payroll with an unemployment number of 3.5% 6) stock market had reached all-time highs. So suffice it to say, all these fundamentals were in high gear and doing great! And then the Coronavirus pandemic hit the US in full force.
While I am writing this in the midst of the crisis, as a realtor, I want to help people have a level of concern and care of the crisis, without a doubt it is serious, and yet have a calm understanding of the fundamentals of the real estate market. So when we do come out of this crisis and time will tell whether that is a few weeks or several months, we need to understand that the STRONG fundamentals in the housing market going into this crisis are still in place, and will be the launching pad from where it goes from there. Here are some considerations for why I can say that.
Home builders have not been building homes at a pace to currently keep up with the demand for housing. This is one reason that we have endured a housing shortage for multiple years and a cause for home prices and rental prices to steadily rise. Currently the home build rate is about a million new units annualized, which has been behind the demand by a half a million units per year. So, low inventory will continue after we come out of this crisis.
Interest rates are currently averaging 3.375% and will be fuel for buyers demand to purchase homes, to take advantage of this. One benefit in today’s market is less buyers to compete with, which translates to less competition and possibly more opportunity to negotiate a fair price. The market time to sell is currently up at 39 days to sell with the same mix of demand and supply numbers for homes under $1 million.
Listen, there is little doubt that we are in strange times, but I have buyers who want to buy after this settles down and sellers who want to sell, so I just want to encourage you that there is a lot to be confident about for the future based on the fundamentals, despite the difficulties we are all having right now.
(Stats by OC Housing Report)
Mike Rains- Realtor RE/MAX TerraSol Huntington Beach CA