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The average U.S. rate for a 30-year fixed mortgage dropped to 3.15% last week. It is the lowest ever recorded in a Freddie Mac data series that goes back almost five decades.
The rate fell from 3.24% last week, setting a new record low for the third time in three months, according to the report.
Mortgage rates have fallen after the Federal Reserve began buying mortgage-backed securities to stimulate demand, said Chris Low, chief economist of FHN Financial in New York. The Fed has purchased more than half a trillion dollars of MBS after restarting in March a bond-buying program it used during the financial crisis more than a decade ago.
When the initial plan of buying $200 billion of MBS didn’t lower financing costs, Fed Chairman Jerome Powell said on March 23 the central bank would buy whatever was needed to move rates. It worked.
“The Fed is by far the biggest player in the mortgage markets right now, the biggest buyer of mortgages, and because of that, they have almost complete control over the interest rate,” Low said.
That means the central bank has the ability to stimulate home sales by driving rates to lows that most people wouldn’t have thought possible a few years ago, said Low.
“Every economist had doubts about how housing would fare during COVID-19, but what we’ve seen has been absolutely remarkable,” Low said. “Home sales are holding up extraordinarily well, and that’s in large part because of the mortgage rates.”
Last week, applications for mortgages to purchase homes gained for the sixth consecutive week to a level that was 6.7% higher than a year ago, when the U.S. was having a normal “spring homebuying season”.
A seasonally adjusted index measuring purchase applications jumped 9%, the Mortgage Bankers Association said in a report on Wednesday. The so-called purchase apps were up 54% from early April when most U.S. states were under lockdown orders to keep people at home in an effort to stem the spread of COVID-19.
Is now the right time to purchase a new home or make investments in this real estate market?
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The past several years have been marked by an increase in average rent prices in many major U.S. cities, a lack of affordable multifamily housing, and a tight rental market. The pandemic and potential recession that may result isn’t likely to lead to more affordable housing, but it could lead to opportunities for some investors ready to cash in on properties in secondary markets.
Here are 3 ways that the multifamily housing market might be impacted by the pandemic.
1. House Foreclosures Could Lead to More Rental Demand
For the immediate future, tenants may be stuck in place, unable to move either due to logistical or economic reasons. Some multifamily buildings are prohibiting new residents, while others only permit remote showings, which can make it harder for prospective tenants to make a decision.
A report from Attom Data Solutions showed nationwide foreclosure lows in February 2020. However, Chief Product Officer Todd Teta predicts a rise in foreclosures once courts lift the ban on foreclosures and evictions. This could lead to more people seeking apartments, which could create a market ripe for landlords.
Much depends on what happens once the country re-opens—and when that phased reopening occurs.
“We want states to open up at a safe pace, but obviously, as the economic situation gets worse, that will impact the opportunities available in the market,” says Brant Brown, COO and CFO of Westmount Realty Capital, a commercial real estate investment and development firm in Dallas. “We’re looking at what the unemployment story is going to be, what collections are going to be, and how quickly the states re-open.”
2. Tighter Lending Restrictions Will Force Investors Not to Over-Leverage
The NMHC report spotlights tighter lending restrictions, showing the Equity Financing Index dropping from 61 to 13, and the Debt Financing Index plummeting from 68 to 20.
According to the report’s statistics, 75% of respondents said that equity financing was less available than in the three months prior; 71% of respondents said debt financing conditions were less favorable.
Especially now, Brown advises investors to avoid over-leveraging property or not leaving enough cash in the bank for repairs and emergency expenses, which could include tenants not paying rent due to job loss.
“A lot of multifamily operators have been running their properties cash-poor. In times like this, it really catches up with them,” Brown says.
In spite of low interest rates, underwriters will be looking to make sure investors have sufficient capital to manage the property.
3. Investors could find opportunities in suburban markets.
The second month of the pandemic in the U.S. found many city-dwellers temporarily fleeing their apartments for more space and a change of scenery.
“The fundamental story of [urban] markets is attractive, so I wouldn’t place bets on what the long term [impact] will be,” Brown says. “In the short run, a lot of people are very concerned about [the spread of the virus], and they’re going to vote with their feet.”
Cities may become less desirable places to live as the risk of infection continues to weigh on communities and remote work has people spending more time at home. Residents may seek larger apartments with more amenities in less populated areas, says Brown. “Wherever they move, it probably won’t be those city centers.”
One positive thing that appears be to happening in the time of coronavirus sheltering /staying in place orders is that people are engaging in more home hobbies and creative activities that they may have not had time for before due to social activities. One can see a lot of articles about staying creative or why the quarantine can make one more creative. One activity that Americans apparently have spent more time and money on is gardening, based on retail sales and employment data. This is a good time for homeowners because gardening, yard improvements, and minor home renovation or simple do-it-yourself projects (deck) improve curbside appeal and reflect the kind of care and maintenance that homeowners put into their homes, both external and internal. Attractive gardens, a clean yard, freshly coated fences, mended pathways will make a home attractive to buyers, in the time of and after the coronavirus social distancing period.
Retail sales data from the U.S. Census Bureau showed that retail sales of building materials, garden equipment, and supply dealer stores (NAICS 444) increased 1% in March from February and was up 7% on a year-over-year basis. In comparison, retail sales and food services fell 9% on a month-over-month basis and 6% on a year-over-year basis. Other industries that had higher sales in March were grocery stores (+27% m/m and +29% y/y); health and personal care stores (+4% m/m, +4% y/y), and general merchandise stores that includes department stores and other general merchandise stores (6% m/m, 7% y/y).
In 2019, Americans spent nearly $380 billion (retail sales) on building materials, garden equipment, and supplies. Building materials and supply stores (paint and wallpaper stores and hardware stores) sold $334 billion (so $41 billion is garden supplies).
While brick-and-mortar retail stores have shed about 300,000 jobs since January 2017, the employment in brick and mortar stores has remained relatively flat at 1.3 million. In March 2020, it is one of the few sectors that posted year-over-year employment gains, of 11,500 jobs. However, employment did fall by nearly 4,000 from February to March.
What’s the impact of projects that improve a home’s curb appeal on the likelihood of selling a home and home values? According to NAR’s 2018 Remodeling Impact Report: Outdoor Features, “74% of REALTORS® suggested sellers complete a landscape maintenance program before attempting to sell, and 17 percent said the project most recently sealed a deal for them, resulting in a closed transaction.” The cost in 2018 was $3,000 and 100% was recovered when the home was sold.
Since 2009, the prices of single-family homes have also picked up faster than condominiums, as low mortgage rates have made a home purchase more affordable, as well as due to difficulty obtaining individual-unit mortgage financing in condominium projects that are not FHA-approved.1 As of March 2020, the median sales price of single-detached as $282,500, or nearly $20,000 more than the median sales price of condominiums/coops of $263,400. Since January 2012, the median sales price of single-family detached homes has increased by 83% compared to 70% for condominiums/coops. The higher price of single-family homes reflects the preference of buyers for these homes, perhaps because the house with the picket fence and green yard embodies the attainment of the American dream of homeownership.
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