5 Trends in Mortgages and Real Estate for the Second Quarter of 2020

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The property market remains in uncharted waters, as COVID-19 threatens to disrupt every part of the industry, from see-sawing mortgage prices to abandoned open houses due to social distancing laws.

Of uncertainty and ambiguity, there is a certain degree of unpredictability, a common theme among the experts asked to forecast developments for the second quarter of 2020.

All is known is that the spring homebuying season will look different from the business-as-normal scenario that everybody expected at the beginning of the year. Here, experts break down five patterns that consumers can keep an eye on in the second quarter of this pandemic year.

  • Trend 1: Homebuying will slip for spring
  • Trend 2: Home prices will stay steady if COVID-19 is short-lived
  • Trend 3: Mortgage rates are likely to decline even more
  • Trend 4: Refinancing will begin to rise
  • Trend 5: Online techn will become even more important

Trend 1: Homebuying will experience downfall for spring

The spring homebuying season is headed for a decline, which analysts say will last at least until the summer. When housing gears cease, less people qualify for home loans, a phenomenon that will intensify when Americans stay home by tens of millions.

Purchase loans dropped 10 percent from last week and 24 percent from last year at the weekend of March 27, according to data from the Mortgage Bankers Association (MBA) weekly mortgage applications survey. This decline in mortgage loans comes as no surprise when people are forced to shelter in place, making it harder to complete the home buying process.

Meanwhile, the refinancing share of mortgage applicants rose by 26%, reflecting the eagerness of homeowners to lock in low rates in a competitive mortgage environment. For some of the COVID-19 hotspots, mortgage approvals were up, but most likely refinancing was due to a decline in sales, according to an MBA spokesperson. New York had a 16 percent rise and California rose by 18 percent.

The reasons for the anticipated slowdown in Q2 are both logistical and economic.

Today, 75 percent of the population, or 250 million Americans, have been called to shelter at home. This makes it difficult, if not impossible, to purchase and sell your house.

Mortgage originations rely on several sources, including government departments (which are a part of various processes from records to title searches), and closed government offices can mean delayed transactions.

Heidi Lombardi, a licensed mortgage loan originator for American Mortgage in Tampa, Florida said that if title companies are unable to report mortgages and complete their necessary work due to the closing of county and state offices, loans will not be able to close.

Similarly, as COVID-19 continues to spread, more assessors and regulators will be required to avoid inspecting properties, which means that borrowers will not be able to finance mortgages.

In large cities, such as Manhattan, which was one of the hardest hit areas, the listings were down 85 percent at the end of March relative to the same time last year, according to data from UrbanDigs.

Rich Schulhoff, CEO of Brooklyn MLS said that he expect a substantial drop in second-quarter figures, as do most other companies. Public houses are not permitted and the shows have gone the virtual way. The evaluations are continuing with limits. Any appraisers, if permitted by homeowners, go into home while keeping their distance.

But the harm could be short-lived

The economic effects may also play a major role in a slow spring homebuying season. An unprecedented 3.33 million Americans filed for unemployment by March 21, and the figure continues to grow. Mass layoffs have generated confusion, which would prompt lender pullback and drive some prospective homebuyers out of the market, at least for the time being.

Nearly every sector has been hit by the pandemic, throttling big businesses that have employed employees around the world. Marriott, one of the biggest hotel chains in the country, said goodbye to hundreds of thousands of employees, and airlines are in the process of temporary layoffs of up to 90% of their workforce.

Selma Hepp, Deputy Chief Economist at CoreLogic said that although the majority of employees who are hard hit by the sudden cessation of economic operations are usually hourly staff who will not normally be on the market to buy a home, the effect has also extended to salaried workers. It appears that prospective homebuyers who serve in the sectors most affected are more likely to delay the homebuying decision. Volatility in capital markets would also have a negative influence on equity for the higher-income community. The demand was solid prior to the pandemic, which may mean that the normal hot spring homebuying season is not cancelled, but postponed back to fall, according to Lawrence Yun, Chief Economist at the National Association of Realtors.

Yun notices that, unlike 2008, there is no subprime debt and overproduction by homebuilders. Sales will plunge for a couple of months, but rates will hang on. Despite the stimulus package, any missed revenues are expected to surface as a deferred purchase in the second half of the year.

Trend 2: Home values will remain stable if COVID-19 is short-lived

Homeowners have seen their property value rise slowly, amassing record levels of home equity. In 2019, homes with mortgages (approximately 63 percent of all properties) had a substantial 5.4 percent year-over-year home equity increase, totaling around $489 billion since the fourth quarter of 2018. The typical household, with a mortgage, had a total of $177,000 in home equity at the end of 2019, according to CoreLogic’s data analysis.

One problem for homeowners is what happens to their property prices during this crisis. The conclusion is clear around the board: it depends on how long the pandemic continues. In the short term, experts agree that prices would flatten, but the long-term effects depend on how severe the virus shutdown is in our economy, which could mean the difference between a slowdown and a depression.

Pat Stone, executive chairman and founder of Williston Financial Company in Portland, Oregon, thinks that if the effect is minimal, with infection rates falling significantly in the next four to six weeks, the contraction will last six to nine months and the effects on home price depreciation will be restricted. If the pandemic spreads further and homebuying stays sluggish, we’ll see significant declining home values. Once we regain economic momentum in either scenario, home price appreciation will regain pace.

Another hypothesis is that only the most vulnerable regions will see an impact on house values, particularly if the economic factors of the region (hospitality, for example) are depressed.

Signs are positive, though, for a complete comeback, Hepp notes, citing pent-up demand and very small stock inventory across the country as two signs that the market is primed for a fast turnaround.

Low interest rates will also further raise home purchases as construction returns, helping to hold house prices up. However, if the buyers would afford to sell, they might increase their earnings if the economy gets back on track by declining.

Todd Teta, Chief Product Officer at ATTOM Data Solutions expects a much lower level for Q2, but not an immediate drastic price effect. Some sellers are going to rush and take cheaper prices; some are going to take dramatic discounts; other sellers are going to hesitate.

Trend 3: Mortgage rates will likely drop even more

Mortgage prices have been on roller coasters, whipsawing professionals and customers alike. Without usual market mechanisms, such as the plummeting 10-year Treasury bill returns, prices have risen and fallen almost unpredictably. The causes became more clear in retrospect.

With levels reaching new depths, the mortgage pipes were clogged, and borrowers needed to increase prices to stave off further demand from customers who wanted to refinance or tie up a buy loan. Erratic rate swings emerged in March as borrowers shied away from mortgage-backed securities or MBS. Lenders usually swap these securities to offset their chance of rate increases from the period the borrower requests and exits. The MBS market exploded as capital markets cratered and customers became elusive.

In addition, the Federal Reserve used quantitative easing or QE to pump billions into the MBS market and ensure that mortgage rates remained low. The Fed has written a blank check, offering to buy billions from the MBS corporation, which comes from Ginnie Mae, Fannie Mae and Freddie Mac.

Experts say this move would help bring mortgage rates back into balance, helping to push them into a low 3% range during Q2.

Hepp said that with many measures in place thanks to the Federal Open Market Committee (FOMC) to ensure sustained economic growth and market liquidity, mortgage rates are expected to hit new levels in the coming weeks and months. The current burden on the financial system has led to a rate increase in recent weeks, but the prices are expected to fall again. Heavy volatility is creating a significant variation in the mortgage rate projections up to 2021, while many predict the 30-year fixed-rate mortgage rate to be about 3% or lower.

Trend 4: Refinancing will continue to rise

As mortgage prices drops, the number of homeowners who can save money by refinancing increases. When, for example, the rate falls to 3%, about 19.4 million homeowners will be liable, according to the Black Knight mortgage data analysis.

In fact, an opportunity to refinance increases with the amount of money lenders can save. Currently, 50 percent of unpaid mortgage debt have an interest rate of more than 4 percent, while 24 percent of borrowers have an interest rate more than 4.5 percent, according to CoreLogic.

Prepayments rose by 8 percent in January as refinancing activity intensified, according to Black Knight, and this trend is not expected to slow down.

Suming up – the second quarter will start to see a surge of refinancing applications, according to McBride.

Equity-rich homeowners may consider cash-out refinancing as an option if their income was impaired by the coronavirus, McBride adds, particularly for those who are long on equity but low on savings.

However, lenders will also run credit and career checks, and applicants who are out of employment are unlikely to be eligible for cash-out refinancing.

Jerry Schiano, founder and CEO of Spring EQ in Philadelphia said that COVID-19 could impact cash-out and home equity loans later in the year if house rates went down because lenders would have less available equity. That said, program manuals have been cut, and if people have a cash need for potential home renovation or big expenditures, such as marriages or education, and are still working, I would consider borrowing now. If they’re unemployed, the loans won’t lock.

Trend 5: Digital tech is going to become ever more important

Contactless technology becomes the ruler of a contactless world. Lenders and borrowers, forced to stay away as a result of COVID-19, are now dependent on a host of remote technology solutions to run their company.

It is now more important than ever for both private businesses and government departments to consider embracing readily accessible electronic technologies such as e-signatures, smartphone image capturing, digital data, automatic valuation frameworks, remote online notarization and e-closures. Experts alert anyone who won’t do so will be left behind.

Jarred Kessler, CEO of EasyKnock, a proptech firm providing home rental services said that seeing the rise in refi market, the appraisers are strong and in demand. Inspections need imagination, such as images with discount avoidance. The bigger and more challenging problem is that many counties have not transitioned to e-signatures and there is no greater time than now to allow it when some court structures are shut down. Buyers and sellers can use video technologies to view their properties, which may be of specific benefit to buyers who have to relocate because of work relocations, for example.

Ilyce Glink, author of “100 Questions Any First-Time Home Buyer Should Ask” said that nobody wants strangers in their homes right now, so interest in video tours has increased since open houses have been scrapped. Closings are occurring remotely or in drive-by mode, where buyers don’t even get out of their vehicles. We will probably see even more of those approaches.