Throughout California, homes are selling quickly. 46% of homes are on the market less than two weeks. Using data from Redfin, 54% of offers were contested. The breakdown by region is 67% in the San Francisco/San Jose area, 65% in San Diego, 58% in Los Angeles, and 47% in Sacramento. However, don’t mistake this for a healthy market — we’re still in a transition period.
The actual reason for low days-on-market is a combination of high buyer demand, due to low interest rates, and low inventory. Those who are able to buy correctly recognize this as a great time to do so if you are able to afford it, and are scrambling to get at what few properties are available for sale. Even the high demand, though, is merely high relative to inventory — there still aren’t very many people who are able to afford a purchase right now. Whether or not we get a COVID-19 vaccine before then, the housing market won’t properly right itself until the job market stabilizes. The expectation is that this won’t happen until 2022 or 2023.
AB 3088 was signed into law, extending eviction moratoriums to January 31, 2021, under certain conditions. While tenants will still be responsible for unpaid amounts after this date, they cannot be evicted for missing payments between March 4 and August 31. For rent due between September 1 and January 31, tenants will be required to pay at least 25% of the amount owed each month to be immune to eviction. Tenants also are not immune to eviction for causes unrelated to missing payments.
In order to be eligible for these protections, tenants will also need to declare financial distress as a result of the COVID-19 pandemic. This could be in the form of loss of income, increased expenses related to performing essential work or to health care, child care, elderly care, disability, or sickness, or some other category, but must be a result of the pandemic. This declaration also applies to 15-day eviction notices the tenant may receive. If no response is provided, the tenant may still be evicted.
The increasing number of people working from home was initially supposed to be a temporary response to COVID-19 lockdowns. Companies also took it as an opportunity to experiment with the work-from-home model. And for the most part, it seems to work. It’s expected that there will be many more permanent work-from-home positions even after vaccines are distributed.
This has had and will continue to have implications for spending patterns and stock values. Traditional work clothes aren’t necessary for many people, nor is spending on commutes, work lunches, and coffee breaks. Most shopping is going to be done for the home — and also at home, signaling a boon for e-commerce. In the real estate sector, commercial construction is expected to drop as fewer companies require as much office space. A major advantage of the work-from-home model is that more people are able to enter the workforce, since it opens the doors to people unable to commute, such as those who are disabled, can’t afford reliable transportation, or have children at home.
As of July, over half of adults under 30, 52%, are now living with one or both parents. The previous recorded high was 48% in 1940, eight decades ago. No data is available for the period including the Great Depression, but it’s likely the number was higher during that period. The majority of this increase comes from those in the 18 to 24 age range, with particularly large spike in April.
In some instances this could be a conscious choice, at least initially, as people moved in with their parents during lockdowns so they could isolate with family members instead of alone while working from home. Even for those for whom this was the plan, their stay has been extended longer than expected. For most people, though, it’s because they aren’t working from anywhere — it correlates strongly with rising unemployment numbers. Unemployed young adults aren’t financially stable enough to become independent homeowners. Increasing student loan debt is also a significant factor.
As a result of home sales volume dropping by 30% in Quarter 2 of 2020 from 2019, loan origination has also dropped considerably. The effect was somewhat lessened by low interest rates, which resulted in more refinances. The commercial sector, however, didn’t have that luxury. The Mortgage Bankers Association (MBA) forecasts a 59% decrease from 2019 in total commercial loan amount, from $601 billion to $248 billion. The majority of this will be from the multi-family sector, which was at a record high of $364 billion in 2019 but is only expected to reach $213 billion this year.
Lenders are optimistic, though, as long as governments can continue to keep people housed. Vacancies aren’t great for lenders, as they reduce the prospects of landlords, and recently evicted people certainly won’t be looking to originate new home loans any time soon. The MBA expects 2021 to bring the number up to $390 billion for commercial loans. The catch is that commercial landlords aren’t protected by the recently extended foreclosure moratorium. If multi-family homeowners are hit with a foreclosure, all their tenants will be affected as well. Commercial property owners as well as lenders are looking for new methods of loan accommodations.
There are two types of mortgage loan insurance, and it’s also possible to avoid needing insurance. Mortgage insurance premiums (MIP) are the type of insurance required by the Federal Housing Authority (FHA). The other type is private mortgage insurance, or PMI. It’s easier to qualify for FHA loans, but private loans come with some additional benefits if you do qualify. Most notably, it’s only PMI that you can avoid; if you only qualify for an FHA loan and not a private loan, MIP can’t be ignored.
Private lenders generally have stricter credit score requirements than the FHA. In return, the higher your down payment, the lower your premium amount. Furthermore, if your down payment is at least 20%, you aren’t required to get loan insurance, so you avoid paying PMI. If you’re getting an FHA loan, you’re stuck with MIP for at least 11 years. On the bright side, the down payment amount to qualify for a reduction to 11 year MIP is 10%, not 20%.
Generally, the greater you can make your down payment, the better. Of course, paying all cash to avoid a loan at all is ideal, but not everyone can afford to do that, so keep in mind the important breakpoints. If you qualify for a private loan, putting at least 20% down is probably your best bet. Even if you only qualify for an FHA loan, be sure to put at least 10% down so that you aren’t stuck with MIP for the entire duration of the loan.
Sales volume and home prices tend to correlate, albeit on a delay of about a year. It’s usually helpful to look at changes in one to predict changes in the other. But sometimes that’s not the case — most notably, at the start of an economic recovery. Looking only to sales volume to forecast a recovery can result in some false starts.
This happened in 2008, and may be about to happen now. Home sales volume shot up between 2008 and 2009, but crashed back down the next year. This is because economic stimulus resulted in temporary buyer demand, which fell off as soon as the stimulus was used up. Now, in 2020, despite actual buyer demand, sales volume is low as a result of low inventory. Low inventory doesn’t decrease home prices, though, so they’re still going up. Pent-up demand means that as soon as the economy recovers, inventory may be snatched up quickly, resulting in another sudden burst of activity that will rapidly fall off.
So what does need to happen for an economic recovery? The answer is jobs. While sales volume may predict short-term direction of change, the job market is an excellent reflection of the housing market stability, since both homeowners and renters require income in order to make payments. Job numbers aren’t going to be stable for a while either. A full recovery of the job market isn’t expected until 2022 at the earliest, at which point we can start to see the regular patterns emerge again in home sales volume and home prices.
It’s September already! That means it’s time to look at a summary of real estate activity for LA’s South Bay neighborhoods over the past month. Our data is ultra-local which means you get to see the market conditions almost immediately after the month ends.
This summer we’ve been enjoying a relatively busy real estate market with a big jump in sales and mixed results in prices. August 2020 weighed in with the median price nearly 6.8% higher than August of 2019. However, it wasn’t enough to beat the median for this July. August median prices were down by 1.8% from last month. In the first eight months of the year, we’ve seen two months where the median increased, versus six months when it decreased.
We saw 450 homes sold in August, up by 10% from July of this year. Compared to August of 2019, sales this year were up 13%. July and August were exceptional sales months compared to January through June. Both months had sales in excess of 400 units, while the first six months of the year were less than 300. March of 2020 made it all the way to 291 sales despite pandemic activity kicking into high gear that month.
July & August sales were up nearly double the sales numbers from the first half of the year. Why the jump in summer? Anecdotally, we’re hearing interest rates being at or below 3% brought those buyers not financially impacted by Covid-19 to the table. That huge savings in interest helped drive prices, as well. To buy now and take advantage of the interest rates, many buyers have been willing to offer slightly above asking price, to lock the deal in.
August brought a significant increase in the number of homes available for sale. At the end of August total available counts stood at 3.68 months of inventory, compared to 2.17 months at the end of July. In raw numbers, that’s an 18% increase in homes available for sale. More sellers put their homes on the market, and there weren’t enough buyers to absorb the increase. As Covid-19 moves to a back burner, we expect the inventory to return to higher numbers comparable to the beginning of the year.
With subsidies and protective government programs closing, we anticipate fewer buyers will be able to purchase. At the same time, we expect the continuing stress will create more defaults and short sales. Forced sales, also known as ‘distress sales’ tend to push prices down.
Combined, a growing inventory and economic stress are precursors of a shift to a buyers’ market. Several noted commentators are predicting a recessionary market lasting through 2021 and possibly into 2022. Like so many things in today’s world, no one is sure of where we’ll end up. But it’s pretty much guaranteed to be different than we had planned.
The Federal Housing Finance Agency (FHFA) announced in August that it would be charging an additional refinancing fee to offset losses due to COVID-19. The new fee was expected to come into effect yesterday, September 1st, but at the last minute, the FHFA rescheduled it to December 1st. We’re still in the midst of a recession, so the FHFA doesn’t want to make too many changes too early.
The new fee exempts refinance loans with balances below $125,000, affordable refinance products, Home Ready, and Home Possible. Applicable loans, which are cash-out and limited cash-out refinance loans, will have 0.5% added to each transaction. While this fee applies directly to lenders, it also indirectly affects borrowers in the form of higher interest rates. While the FHFA certainly wants to recoup their projected $6 billion in losses, they’ve agreed that now is not the time; the economy still needs to recover first.
Long Beach just started the planning process for a basic income pilot program. It’s very early in the process, so not much is known, but the City Council just had their vote today, September 1st, and unanimously approved the program, which means it’s sure to happen in some capacity. This pilot program will be privately funded, so it’s not going to be a tax burden.
The decision arrived after witnessing the success of a similar program in Stockton. The Stockton program tested a $500 basic income for 18 months, given to 125 randomly selected residents. The spending breakdown was 40% on food, 25% on merchandise, and about 12% on utilities. It’s unclear what happened with the other 23% — it’s possible it was saved, or maybe it was spent on other categories not listed. Now the mayors of 15 other cities across multiple states want to try it, including Oakland, Long Beach, and Los Angeles in California, Newark in New Jersey, and Columbia in South Carolina.