Welcome and thanks for joining us. I am Josh Lewis, broker-owner at BuyWise Mortgage in Huntington Beach, California.
And this is the Coronavirus Mortgage Market update for Monday, April 13th, 2020. We’re going to go through the typical format, we’re gonna talk about what interest rates are doing.
This isn’t so much just an interest rate update, but it’s interesting because markets are so manipulated right now. And you’ll see here when we look in a minute.
So we’re gonna do that and then we’re gonna cover one of the most important questions that I’ve been getting here is, are we going to see home values crash are we’re gonna see the real estate crash?
We’ve been on a long run of increasing home values for about the last 10 to 12 years. And it’s a valid question if a lot of the people that we talk to on a daily basis are renters and they wanna become a first-time buyer.
They wanna buy but they don’t wanna buy if home values are gonna drop they would like to wait and get in at a lower price and our homeowners that have a significant portion of their Net Worth in their home equity, obviously wanna know, hey, am I going to lose some of that?
And what does it mean for me? So let’s jump in here, and wanna look first at the bar chart. Bar chart doesn’t mean a lot to consumers, but I always like to run through it.
We had talked that over the last couple weeks, the Fed had done a really good job when they jumped in and started buying bonds, they caused a lot of disruption here. And about two weeks ago, they kind of figured out the Goldilocks level of not too much, not too little, but just the right amount of mortgage buying.
You have seen mortgage bond prices just creep up day after day, which in a normal market, bond prices increasing leads to lower interest rates on your rate sheet. Well, today you see this ugly red candle here.
And it’s actually it’s not all that ugly. And let me actually do this make me smaller and make this bigger. It’s not that ugly of a red candle. It’s a small move. This is an ugly red candle.
But that tells us that we lost about 60 basis points in the bond market today and on the rate sheet that would typically tell us that we’re about an eighth of a percent worse in interest rates than we were yesterday.
So we’re still well within this range, but it’ll be interesting to see what happens. So anytime we see something a deviation from what we’ve recently seen as the norm, I always want to look and say, Well, what was different today than the last two weeks.
And if you dig beneath the numbers, for the last couple of weeks, the Fed had planned to buy about $40 billion of mortgage-backed securities. And they had dialed that back to about 20 billion a day.
So today, the plan was to buy about 20-22 billion, which is still a ton of mortgage-backed securities. But they ended up buying about 12 billion.
So we saw about half the buying that we saw last week, and as a result, we lost about 60 basis points. So this is still a heavily manipulated government-dominated market right now. I don’t think the feds gonna let this fall a lot lower. But it’ll be interesting to see.
But again, from a consumer perspective, from a real estate professional perspective, what matters?
What matters is that what this translates to, in terms of rate sheets, So as of today, if you remember on Thursday when we did the update, the markets were closed on Friday for Good Friday and the Easter holiday, but we’d closed at about three and three-eighths 3.375 with zero points for the best-qualified borrowers.
And we’re still there as of today, despite the little move, blip was in mortgage bonds. Now FHA is a little bit worse, we’re a little bit under 3% with a little bit of a lender credit.
As of today we’re right around 3% with no lender credit, same for VA. Now, the crazy stuff that we’re seeing is over here in the high balance, so, loans over 510,400.
We’re seeing conventional loans at 4%. With a half point, we were looking at 4% with zero points on Friday. So that pretty much that movement in the mortgage backed securities market today translated directly over to our rate sheet.
FHA high balances about three and a half with zero points, and the VA is at three and three quarters with a whole point, so it’ll be interesting to see how that shakes out. There’s real problems in the government loan servicing segment.
And it’s interesting that it’s not playing out here and showing up more in the standard balance loans. But we’re really seeing it on the high balance stuff.
So here in Orange County, LA County, the Bay Area, probably 40-50% of California and the most populous areas, have those high balance loans, rely on them heavily.
It’ll be interesting to see what happens and how that shakes out. Now, with that behind us, let’s take a jump in here and say is or ask, Is the housing market likely to crash? Is it going to crash? Is it likely to crash?
And the short answer is I don’t believe so. We are likely to see some short term damage and a couple of experts that I like to follow. Ivy Zelman and John Burns.
Ivy Zelman and John Burns are both national housing analysts and they would probably have a different opinion if we were to ask about a specific market like California or Hawaii or Florida. But Ivy Zelman thinks we’re gonna see maybe a two to four percent downturn.
John Burns is a little bit more bearish and thinks you’re going to see a 10% downturn. I don’t think it’s going to be that extreme. And for a lot of the reasons that we’re going to cover here, so let’s, in looking at the answer this, let’s ask the question what has to happen for values to crash?
First of all, we have to see massive economic destruction and not that’s not to downplay what we’ve seen so far to say that we haven’t already seen that. I just mean a lot, a lot worse than what we’ve already seen.
So far the government has stepped in with a massive stimulus and put a big band-aid on the problem, and it’s still a problem. So that tells you we’ve seen massive economic destruction, but a short lockdown we’ve been in our homes about a month a little less than a month.
If we’re here for another month, that’s still a short lockdown. Now if we get to four to 11 months of stringent lockdown where you’re required to be in your home, only to go to doctor’s appointments or the grocery store, like you can’t go anywhere.
That would over a 6, 9, 12 month period have a really negative impact on the economy, and which start to show its effects in housing. So a lot of so much of what I see right now is people online telling you, here’s the answer.
Here’s what it is. We only know the answer when looking when the rear-view mirror. So right now we don’t have the rear-view mirror, we’re looking through the windshield going down the road and saying, what’s coming up? What do we expect to see?
The expectation is that somewhere in the next four to six weeks, we’re going to be released back out into the real world, most people are going to be able to go back to work in some way or fashion.
And if that’s the case, we wouldn’t see the first element here. So element number two, you would need to see a rapid increase in inventory of homes available for sale. So again, this would require a longer term lockdown, because right now, seller see this as a temporary issue.
They don’t want people coming through their homes, they don’t want to be exposed to people. They’re not certain what’s happening with the markets. They’re just pulling their homes off the market.
So an increase in inventory is an increase in supply anytime you have a greater supply of something, the price is likely to go down. Right now we’re actually seeing less supply. We started this crisis with very low inventory levels depending on where you’re at, really, really low inventory levels.
And we’re seeing even lower levels still because of sellers just pulling their homes off the market, or at least putting them in a whole do not show status, where you can’t see their home, although it is technically still for sale.
So the third one, we would want to see if you are a believer that there’s going to be a crash, you would be believing that there’s going to be a significant volume of distressed sales. Well, at least for the next year, we have a massive impediment to seeing any distress sales.
As part of the Cares Act and the stimulus, the government has dictated that any holder of federally backed mortgages has to offer forbearance of up to 360 days. And during that time, that they have to offer the forbearance, they cannot start for foreclosure proceeding.
So we’re looking at a moratorium on foreclosures, you can’t foreclose, you have to give people forbearance options to work with them. So it’s not super likely that we’re gonna see any distressed sales in 2020. If we were they would have to come in 2021.
And again, it goes back to this, we have to stretch out a lot longer than what we think. The other reason or the secondary reason why we’re not likely to see a significant volume of distressed sales, is there’s not many high risk homeowners.
So what do we mean by high-risk homeowners, those at the lower end of the credit spectrum, those with less stable jobs and with less of a cushion of equity built up in their homes. So anyone who bought more than three years ago, has seen 10-15% run up in their home values.
Most people have not taken cash out. So what are we talking about? FHA buyers that have bought in the last year to two years that were at the lower end of their credit spectrum. S
o for those reasons, we don’t expect to see much of a volume of distress sales this year, or likely next year. So the next one, you would see sellers would then accept a deep discount, versus just deciding to ride it out.
So the important thing to remember is we were already seeing a longer term trend of people staying in their homes for longer.
You know, when I got in the business back in the 90s, the numbers sort of showed that we would be looking at a five to seven year timeframe and in a home, and people would either sell and downsize, sell and move, sell and buy a bigger home.
And now we’re seeing that home tenure in home of being more like about a 10 year timeframe. And in California, we’re seeing that stretch even longer.
So think about if you were in your home you bought in 2010, in California, that was almost the perfect time to buy, you could have probably got as late as 2012 or 2013. But a lot of those people have seen their home values double.
So if you bought a $300,000 home in LA, you’re paying about $4,000 a year in property taxes despite the fact that your home’s now or six or $700,000. So you may say hey, I’m ready to move up. I’d like to buy that million dollar home.
Well, your million dollar homes gonna have $12,000 a year of property taxes versus $4,000. For that reason, especially in California, people are just staying put longer. So if you don’t like the market, things are going sideways.
If you’re not in significant distress, if you don’t have to sell, why not just stay put, and that’s what we’re seeing more and more people decide. So what the last piece is, employment stress has to move to higher income jobs.
What we’re seeing right now, most of the jobs that have been impacted and by no means do not take this to say that, hey, no high income earners, no people with high level jobs have been impacted, because depending on what you do, you could have been impacted severely, no matter how good you are at what you do, an example is a client I have is a physical therapist, well paid very important.
Physical Therapists put their hands on clients, most of them are not working right now during this, but the majority of the distress is currently in the renter segment of the population, and that’s where we’re seeing the majority of the troubles.
So again, lets not to say there’s no homeowners in distress. But relative to renters, it’s just not where we’re seeing the bigger issues. So I kind of wanted to wrap it up with this, to remember the real estate price fluctuations are always local.
They’re tied to the local economy, how well jobs are doing and how well people are doing. And they vary not just on a state level, but on a county level all the way down to the city. Even within cities, you will see different zips perform differently, and different neighborhoods within those zip codes perform differently.
The example that I like to use is in 2008, one of one of my realtor partners and I flipped our first home, and that person was in Anaheim, California. They had paid $685,000 for that home in 2006.
We bought it for $265,000. And we’re happy and lucky to sell it for 400,000 when we put it back on the market, but in its current state that home lost 65% of its value in about two years.
My home in Huntington Beach because it’s an older, more stablish neighborhood, most of my neighbors had already been here for 15-20 years, built up significant equity. They were older, had more financial reserves, we saw about a 20% dip in our values.
Now if we go out further the other way to the Moreno Valley area, I know an investor that was buying homes for $90,000. It peaked at about $400,000. 70-80% decreases in values. And why is that, it’s not the geography necessarily, it’s the makeup of the buyers and the owners.
So what happens? In a perfect world people would love to live in Newport Beach or Corona Del Mar. Those home values go super high and you get pushed to a lesser community like Huntington Beach and then you get priced out of Huntington Beach and you go towards Anaheim.
And then from Anaheim you push yourself out maybe to the corona area, Riverside, and from there you may end up in Victorville. And that’s what we see that those buyers come in later in the stages they put less down, they have longer commutes lower incomes.
So it’s just important to remember, depending on where you are, is going to dictate largely how much you’re gonna be impacted by any decreases in home values. So, values will drop sooner faster and further, in areas with more first time buyers and lower income and employment levels.
So look around where you’re at, we’re seeing throughout Southern California, areas that were more subject to these big swings are not as subject, because values have gone up, you have stronger buyers coming in, people have been there longer.
So it will be interesting. We’re not immune anywhere in the US from a downturn in home values. So we will, we’ll keep an eye on this and the most important thing is remembering we’re going down the road about 80 miles an hour.
We’re looking at this through the windshield. We’ll get super clear on it, in two, three, five years when we can look back in the rear-view mirror. So anyone telling you that they know exactly how this is gonna play out. It’s just not accurate.
This is the best information that we have. These are the numbers have always mattered. And they’ll always continue to matter going forward when we’re looking at these numbers. So let’s just say, close here for Orange County.
There’s a gentleman that does reports on housing. And we’ll put a link in here, so everyone can check that out. And I see there’s a couple of questions in here. I will definitely get everyone’s questions answered, just want to finish up with this, and make sure we get where we’re going.
But this is a typical story that we’re seeing everywhere. But for Orange County, this is a snapshot of of demand. So typically, the last two, three years 2017, 18, 19 we’ve seen anywhere from 2500 to 3000 pending sales per month, homes that go pending and close.
Right now we’re at about 15, half of normal, so it tells you the demand people going out and putting homes under contract is low. Now you would say we’ll see home values are gonna drop. Well, if we look over here on the next slide, we can also see we have really low supply.
So the last few years, We varied anywhere from 5000 to 6500 homes for sale, which is a low number. But right now we’re right over 4000. So with 1500 or so a month demand and only 4000 homes on the market, it’s less than a three month supply.
We need to get out to 678 months before we even have a supply demand balance. So it’s way too early to make any definitive conclusions. But we’re not gonna see any massive downturn in home values this year.
And God Willing that the whole Coronavirus thing gets solved to a degree in the next one to three months and solved completely in the next 12 to 18 months and the economy can get back going. It’s likely that any downturn that we see in home values will be minor.
So hopefully you found this valuable. If you did check back in Thursday, we’ll be answering the questions that I’m getting. The things that I’m hearing people discussing and seeing online.
If you have something you want us to go over and something that you think would be interesting. We would be happy to do it. So shoot me a message, shoot me a comment here.
Again thanks for showing up. Thanks for asking questions and thanks for tuning in. Have a great night.