Faced with the Covid-19 pandemic, a particularly contentious national election, and weeks of nation-wide civil rights protests, It looked like there was no way 2020 could ever be called a normal year. Then we learned about a growing recession. So halfway through the year, what do we see?
Prices – Up and Down
The South Bay is a nice place to live. Here, the real estate market is frequently shielded from the vagaries of the nation at large. And it’s no different this year. In this chart we compare the average sales prices during the first six months of 2019 versus 2020, by zip code. In nearly all cases the average property price is still going up. Torrance was very nearly flat and 90274 actually dropped slightly. (If your zip code or city is not included here, and you would like statistics, give us a call.)
Volume – Mostly down
With prices are still climbing, albeit slower than they were, what about sales volume. Here we see some negative impact. Hermosa Beach is the only local city not experiencing a drop off in sales. In Manhattan Beach, for example, sales are off by 38% for the first six months of this year. South Redondo is off by 35%. Torrance and the peninsula cities are all down by roughly 5-10% from the number of homes sold in the same period of 2019.
My Crystal Ball
Our Market Trend chart is designed to show whether market conditions generally favorable for sellers or buyers. The year started as a buyers’ market and moved even further toward buyers in February. Since then we have been seeing a slow, but steady movement toward a sellers’ market. Things could change dramatically before the year is out, but right now the red trend line indicates the probability the South Bay will be in a sellers’ market before the end of 2020.
California proposed a Universal Basic Income bill in February, which would be administered by the State Department of Social Services, called AB-2712. This May, AB-2712 was amended, establishing new requirements for eligibility as well as shifting administration to the Franchise Tax Board.
Under the amended UBI bill, the CalUBI Program would be an opt-in program that granted $1000 per month to eligible California residents over the age of 18. The amount is unchanged from the February version, but the amended bill establishes new requirements. The new requirements are:
-Currently reside in California -Lived in California for the past 3 consecutive years -Not currently incarcerated in a county jail or state prison -Income no greater than 200% of the median per capita income in the county of residence
In addition, the amendments make this income non-taxable under state tax law, and won’t affect income eligibility for state programs. Rather than a flat value-added tax of 10% proposed by the original bill, the amended bill gives the California Department of Tax and Fee Administration until July 1, 2024 to report on the feasibility of a value-added tax.
In May of this year, commercial property sales were at their lowest level in a decade, and commercial renters are struggling to pay rent. Retail and hotel tenants, who were hit the hardest, are current on leases at rates of only 41% and 37% respectively as of June. This also affects the income of the landlords and investors.
Currently, California’s state of emergency is protecting commercial tenants from eviction. However, tenants don’t presently have protection for any length of time after the state of emergency is over. There is a bill proposed, Senate Bill 939, which would protect tenants for 90 more days, and allow 12 months for repayment.
One sector of commercial real estate is notably resilient: industrial. With so many people forced to move to online shopping, industrial properties suitable for e-commerce aren’t struggling nearly as much. Nevertheless, commercial real estate is still not going to be a great investment for the time being. We can expect this trend to continue for a couple more years, as 2022 is the earliest expected year of recovery.
Even though number of sales is down from last year, the homes that are being sold are actually selling faster. There is plenty of demand and fierce competition, due to low interest rates. High demand and low supply is also keeping home prices up. The average days on market is now 22 nationwide, down from 25 this time last year. Some cities in California are seeing significant decreases, such as San Diego with a whopping 10-day decline, from 25 days last year to 15 days.
It’s not going to stay that way for long, though. New listings are trending upward, which may feel like the beginnings of a recovery, but it’s more complicated than that. If supply starts to outpace demand, high house prices are not going to be sustainable. Sellers will be forced to either accept a lower price or wait for a better time. With many buyers still not having recovered from the economic chaos of COVID-19, it will be some time before demand can catch up to increasing supply. Recovery won’t truly start until California reaches the bottom, projected to be in 2022.
I’ve previously mentioned that COVID-19 and the current economic downturn have resulted in an increase in mortgage forbearance requests. But what about mortgage applications? Interestingly, even as fewer people are able to pay their mortgages, people are still applying for mortgages, looking to take advantage of the current low interest rates on mortgage loans. And getting rejected at a much higher rate.
Lenders will always want to ensure that people are able to pay back the money they borrow. Obviously if the borrower has a mortgage in forbearance, well, that borrower doesn’t stand a great chance of being able to pay back a new mortgage. But even beyond that, lenders have been tightening restrictions in the wake of lessened economic stability. They are requiring higher credit scores, larger down payments, and more savings. Someone who was largely unaffected by the economic downturn may think they have a good chance at getting their mortgage loan approved. Not necessarily, if they were basing their expectations on old lender restrictions. Lenders are going to need to find the right balance between encouraging borrowers — since that’s how they make their money — and avoiding risky lending practices.
I recently wrote regarding the influx of young adults living with their parents and grandparents during the past few months. These young adults belong to Generation Z. Though economic factors were not the only thing at play in this trend, they’re still a big part of it. So the current situation of this group can help us to understand the implications for housing for the entire generation.
We don’t yet know exactly how long this economic slump will last, but we have some guesses. The optimistic analysis is that the economy will begin to recover as soon as the general population has access to a COVID-19 vaccine, which will allow them to resume their normal lives as both producers and consumers. But housing is expensive, perhaps prohibitively so for low-income workers, and it’s still going to take some time to be able to save enough money for a house. This is especially true when we recognize that a downturn was already coming before COVID-19 hit — the pandemic exacerbated the problem, not created it, so eliminating the pandemic won’t fully eliminate the problem. We may be into the next decade before Gen Z is back on track for home ownership.
During the months of March, April, and May, approximately 2.9 million adults in the US moved in with parents or grandparents. Many of these were college students whose classes were cancelled due to the COVID-19 epidemic, but the enormous spike during those months is also a result of the economic downturn. Young adults aren’t able to justify the expense of living on their own during these times, even if they are able to afford it, which many aren’t.
An adult living with their parents has been stigmatized in the US, seen as the mark of a lazy or irresponsible person. Current events are demonstrating that this isn’t necessarily the case. And the numbers also disagree — in fact, it first became the most common living arrangement for young adults all the way back in 2014. This isn’t a new trend, and it’s not a bad thing. The upward trend may have started with economic imbalances, likely the Great Recession in the late 2000s, but this serves only to obscure the fact that non-economic factors are also at play. More people are going to college and graduate school. Couples are marrying later and having their first child later. The timeline of a young adult’s life has been shifting for nearly 15 years. Of course they would be buying homes later as well.
Record-high unemployment since the Great Depression is worrying for people looking to buy a home. And it’s true that it’s very difficult to buy a home while unemployed, since lenders are are looking for stable income. Unemployment income is considered temporary income, which lenders aren’t going to look at. Even once you find a job again, lenders typically want two years of continuous employment. Gaps in employment older than two years don’t impact your chances of lending negatively, though, so that won’t be a concern in a long run.
Another problem is that lack of income could put a strain on your credit score. While you will eventually become employed again, changes to your credit score can be much harder to erase. In order to maximize your chances of getting a loan in the future, you should do as much as you can, starting now, to keep your credit score intact. Always make minimum payments if possible. Ask your landlord and credit companies about other payment plans, deferment, or forbearance. Cut back on unnecessary spending. The good news is that even if your credit score does take a dive, once you’ve settled the debts and start to rebuild your credit, it shouldn’t take too long to get your credit score back up — roughly six months to year, meaning you may have already recovered your credit before lenders will consider your employment to be stable.
For some people, the impact of coronavirus was minimal and short-lived. These are the people who had job security and a place to work from home, enabling them to continue to earn money while many people were left unemployed or temporarily out of work. Many low-income workers, a group with a large percentage of minorities, were already priced out of owning a home before COVID-19. The economic shutdown exacerbated this issue, while those able to live in relative comfort are looking to enjoy low interest rates by purchasing additional homes, beyond what they already own. This has meant that the housing market has started to rebound relatively quickly, especially in tech centers such as San Francisco, since those with money who are most able to engage in the process were only minorly inconvenienced at the same time that lower-income people fall further behind.
The Tenant Protection Act of 2019 (TPA), enacted last fall, establishes regulations for just cause evictions. The laws primarily apply to apartment units, but may affect other types of residences in certain scenarios. Just cause is required if all tenants have lawfully occupied the residence for 12 consecutive months, or if at least one tenant has lawfully occupied it for 24 consecutive months. In addition, the landlord may be required to provide relocation assistance for no-fault just cause evictions.
The TPA provides several forms used for various types of just cause evictions. The primary distinction is between at-fault and no-fault evictions. The possible reasons for a no-fault eviction are intention to occupy, withdrawal from the rental market, demolition or renovation, or if a government agency determines the property to be unfit for habitation through no fault of the tenant. At-fault evictions are much more complex, and may require either a Three-Day Notice to Perform or a Three-Day Notice to Quit. The latter is also the next step should the tenant not respond appropriately to the former. At-fault just cause may include a breach of lease terms, a default on payment, or criminal activity, among other possibilities.