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Rachel Manning lives less than four miles from the center of Boston, in the popular city of Somerville. Up until about a month ago, she planned to sell her 1,900-square foot, three-bedroom condo and relocate to Washington, D.C. this spring. Her Somerville condo could attract a high enough sales price that she planned to use the proceeds from the sale to cover her down payment on a new home in her new city.
In the past few weeks, though, housing transactions in Boston and other cities around the country have struggled to adapt to the economic and logistical realities that COVID-19 has imposed.
Up to this point, the actual repercussions have emerged unevenly, in part reflecting the uneven timing of the virus’s spread: In some cities, housing activities have remained surprisingly immune to dire coronavirus news, with the parties involved just completing tasks through “contactless” methods. But in other cities, stay-at-home orders and nonessential business closings have delayed or entirely derailed purchases and sales.
Housing Supply and Demand: A Lesson From Economics 101
Potential home buyers across the country had prepared for a challenging spring home buying season. Housing supply continued to sit at frustratingly low levels, especially in areas with stringent limits on new home building. The low supply had helped to fuel year-over-year price gains, pushing buyers’ budgets to the limit for all types of housing.
Then the coronavirus hit the U.S., and hopeful buyers anticipated that they might find a buying opportunity amid the economic uncertainty. That situation may still occur, but the fundamental housing challenges for many buyers continue to hang on for now.
On the supply side, some current sellers opted to remove their homes from the market rather than allow them to languish for the indefinite future. And, for some potential sellers, ever-changing interruptions to daily living have forced them to move housing decisions further down the priority list.
On the demand side, some buyers haven’t yet felt the full economic impact from COVID-19. Others may only experience minor financial difficulties. People in these categories may remain active—if cautious—housing participants, eager to lock in low interest rates and keep plans on track to the extent possible. The ultimate result is a familiar story: too many buyers for too few houses.
Down Payments: Better as Emergency Funds
Buyers on the cusp of purchasing a house typically keep their down payment funds in a plain vanilla savings account, and the stock market volatility has shown in recent weeks why that is a common, prudent suggestion.
Consider, for example, a couple who is interested in moving in the near term but likely won’t feel any urgency to purchase a house until next spring. If their down payment money is invested in a brokerage account, they may have just lost the resources to jump on a good opportunity this summer or fall. The stock market, on average, may offer better returns than more conservative accounts, but we have painful evidence before us that these investments are too exposed to risk for short-term goals.
But even potential buyers who made more appropriate savings decisions may feel stuck on the sideline. Down payment funds that are still intact in a savings account shouldn’t necessarily be used for a down payment right now. Many people will want to hold onto that money until they better understand how the coronavirus will impact their personal finances. The scary reality is that a family who comfortably closes on a house next month may not have the same income later this year.
Buying and Selling Logistics: A Work in Progress
The battle to keep small businesses solvent and individuals employed has required creative business tactics across industries, including within residential real estate. At first glance, a process that involves visiting many other people’s homes seems ripe for chaos and disruption amid a “contactless” spring.
In recent years, the rise of online and alternative resources—from Zillow and Redfin to the ability to tour a home using one-time digital lockbox access—has given buyers and sellers new options.
And real estate agents are inventing creative ways to market their properties. With open houses canceled in many locations, agents are making themselves available over video to walk potential home buyers through vacant and newly constructed homes. Some title companies, meanwhile, are offering drive-through closings that comply with social distancing requirements.
Still, it would be an overstatement to label the home buying and selling process as more efficient or entirely seamless during this unprecedented time. Appraisers still need to visit homes to complete their work, and many understandably want to make sure their health is protected before they walk through an unfamiliar space. Lenders currently are overwhelmed by refinancing requests and a rapidly changing mortgage market, which has the potential to delay their usual closing timing. And everyone has new barriers to completing work, from figuring out how to work productively at home to adapting to new technologies and processes.
The Mortgage Market: Conventional Is Better
The popular notion that buying a house requires a 20% down payment isn’t accurate—the median down payment in 2019 was only 12% (and 6% for first-time buyers). Yet, a 20% down payment, which usually eliminates the need for private mortgage insurance (PMI), remains a wise move in many cases. This has become especially true during the early weeks of COVID-19, which has thrown the mortgage market into upheaval.
In short, a number of cascading events involving financial markets, government policy and economic forecasts have caused investors to reevaluate the risks to which they’re currently exposed. Some of these investors provide the capital for lenders to offer new mortgages. For potential home buyers, right now this translates into a strong investor preference for mortgages that conform to the funding criteria set by the Federal National Mortgage Association (more commonly known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Any home buyer who requires less common mortgage terms, such as a jumbo loan, may have a harder time receiving approval or with a timely closing. As a result, people who started searching for a house months ago may learn in their next conversations with a lender that the qualifications or terms on which they had previously relied no longer apply.
Interest Rates: A Lower Priority?
For the week ending March 5, Freddie Mac reported that mortgage rates had reached an all-time low. The average 30-year, fixed-rate mortgage dropped to 3.29%, while the 15-year, fixed-rate mortgage fell to 2.79%. On March 15, the Federal Reserve reduced its benchmark federal funds rate to a targeted 0% to 0.25%. This decision marked the Fed’s second rate move during March, which generated frequent headlines about falling interest rates.
Many homeowners and potential home buyers conflated these two events, even though mortgage rates don’t move directly with the federal funds rate. The end result was a surge in home refinancing and new mortgage applications, which quickly overwhelmed lenders’ capacity. The demand, as USA Today wrote, “led some lenders to decline new applicants, extend the period it takes for borrowers to close, and to even raise interest rates in order to stem the tide.”
The mortgage interest rate increase simply reflected supply adapting to manage demand.
But interest rates may not need to play a primary role in your decision-making. In any given week, rates may become volatile based on rapidly changing circumstances in financial markets and the global economy. And, for the indefinite future, the economy appears fragile enough that interest rates may not soon rise for an extended period of time.
The Common Element: Have a Backup Plan
Uncertainty—from housing supply to closing logistics to interest rates—has become the common element across the recent home buying and selling process. Opportunities may appear for certain people at different times, but almost everyone—whether buyer or seller—will want to make sure they have a backup plan.
What if government directives change markedly between the time you place an offer on a house and try to close? Some home buyers can protect themselves by adding a dedicated COVID-19 addendum to their real estate contracts. What if a buyer must break a contract based on a contingency clause that they no longer can fulfill? Current renters may want to open a line of communication with their landlord about extending a lease or renegotiating unsustainable rent terms if plans fall through.
Manning, the Somerville homeowner hoping to move to D.C., found that she can’t currently sell her house unless she drops the price significantly, so she has opted to hold off on her preferred life changes. She hopes that, once local governments relax stay-at-home orders, she’ll find a buyer who will pay the true value of her house. If interest rates remain low and the economy continues to struggle, she thinks she may even still find a rare buying opportunity for herself in D.C. But, at this point, she really can’t predict what will happen.