How does pandemic + recession = seller’s market?
You’ve probably noticed the house down the street sold in days — over asking — during a recession and a pandemic. COB Associate Professor Lee Redding explains what’s going on.
When the country had pandemic stay-at-home orders, the real estate market came to a halt. But since the nation opened back up in May, the for sale signs in front of homes come down as soon as they go up.
The National Association of Realtors reported in August that sales of previously owned homes in the United States rose 24.7%, which is one of the best showings on record.
This happened in the same month that the Census Bureau’s Household Pulse survey found that 38.6% of people living in Metro Detroit were behind in housing payments, mostly because of COVID-related job losses. The national unemployment average is 7.9%; that number is closer to 10% locally.
How is it possible that houses are selling for over asking in an economic slump during a pandemic? What gives?
Business Economics Associate Professor Lee S. Redding says the mortgage lenders do. And with extremely low interest rates set by the Federal Reserve, those with purchasing power — people who still have an income and a good credit score — see now as a time to buy.
“The Federal Reserve has signaled that it is not intending to raise interest rates as long as we have low inflation and high unemployment,” he says. “If you’re hoping to get interest on your savings this is bad news. But if you’re hoping to borrow money to buy a house, low rates can be great news.”
Here’s what Redding has to say on why the current housing market is booming today.
Home is where...everything is.
Lee Redding: We've seen more interest in homes and home furnishings this year. From the demand side, people are spending a lot of time in their homes this year, so it's somewhat natural that having a place to live in — and one that you like — is even more important than usual. But with the hopeful vaccine announcement on Sunday, the stocks of stay-at-home companies dropped. We’ll have to see where this goes.
If the shift to work-from-home turns out to be permanent, obviously that would reduce the need for office space, which could lower the value of commercial real estate. So not all types of real estate are doing as well as homes.
You’ll get more for your dollar, thanks to the low interest rates. But that, in turn, is what’s driving up price.
LR: As I’ve shared, because of the pandemic and the associated recession, the Federal Reserve is pushing down on both short term and long term interest rates. This has meant mortgage rates have dropped too. I’ll give an example: 30-year mortgage rates are down about a percentage point over this same time last year. On a $200,000 30-year mortgage, the payment, not including taxes and insurance, at 4% is $955, but if the mortgage rate is 3% the payment is $843. Another way to put that is if you can afford a payment of, say, $1000, you can now pay a higher purchase price for the house — so there will be more competition from buyers. This is why a drop in interest rates often helps the housing market.
Banks are definitely concerned about the pandemic and recession, but they may be less cautious about mortgages than other types of lending. Since mortgage loans have an asset backing them, they are perceived as a relatively safe way to loan money. Also, banks do not have to keep them on their books; the financial markets — backed indirectly these days by the government — can take the loans off their hands.
At this point in time, Redding’s not worried about a mortgage bubble bursting like in 2008. But says it’s important to always finance with caution.
LR: Appraisals — which the banks use to estimate the value of the collateral — try to assess what the market value is at this moment in time, not what it should be. So those numbers fluctuate over time and will reflect changes in supply and demand. Mortgage lenders want to know that if you can’t pay your loan, they will be repaid from the value of the house.
Both the regulation on banks and the behavior of the banks have become more stringent since the relaxed lending behavior leading up to 2008. Over time, there is a risk that we will forget the lessons from that and become complacent and deregulate our way back to a risky position. But I don’t think we are there.