The Corona virus situation has engulfed us all right now including those of us selling Denver real estate. Seems like every time we think we have something figured out, a few days later what we believed to be true changes. Sometimes, we get new information or possibly a new restriction or precaution.
The Denver housing market is right there with the rest of the world. Because of this, I want explain what we know right now about how the virus is effecting our practice of Denver real estate . Please keep in mind that some of this can change by the end today, or next week or next month.
Is Denver Real Estate Proceeding Through The Corona Virus?
The Governor of Colorado classified Real Estate as an Essential Service. So, overall, the answer is yes. But, the actual day-to-day activity looks a little different. The Colorado Real Estate Commission issued a statement to all brokers . It says that although we are being considered essential, “it does not mean business as usual”. The classification allows “essential transactions” transactions to take place. Those include transactions that would otherwise create a homeless person, multiple transactions to fall or some other negative affect to a buyer or seller.
Still, we encourage that decisions be made by buyers via photos and on-line resources. The commission discourages Brokers from conducting live showings in homes. Open houses ground to a halt. About 30% of under contract homes are falling out of contract right now, rather than closing. Both the flow of homes to the market and buyers in the market are down considerably in the past two weeks.
Will Denver Home Prices Decline?
Zillow conducted a study on housing during previous pandemics. Although, I can’t remember any pandemic as severe as this one. The survey concluded that while home sales dropped dramatically during an outbreak, home prices stayed about the same or suffered slight decreases. So, previous pandemics have simply put the housing market on pause.
Although the national and worldwide reaction to this pandemic is very different from those others, it does seem possible that this time could have a similar outcome.
That’s especially true in the hotter real estate markets across the country. Because, those markets are being driven by a continued influx of jobs and people into the local economies. As a result, our usual hot Spring real estate market might just be delayed. Pent up demand could propel more listings and sales. However, if Corona changes, this driver of local real estate markets, the health of these hot real estate markets might also change.
Will Denver Foreclosures Increase?
This will certainly happen. But, nobody knows to what extent yet Denver foreclosures will increase and where they will happen. Again, the length of a national shut-down will in large part determine this answer. The federal government has directed mortgage servicers to offer reduced payments or grace periods on any mortgage backed by Freddie Mac, Fannie Mae, or the Federal Housing Administration (FHA).
This will likely reduce the number of foreclosures but maybe not in all real estate markets. But, it but could also directly affect the flow of money to mortgage bonds, creating an unintended halt in the ability of banks to lend to homeowners. The good news here is that the federal government is aware of this situation and is already putting measures in place to try to alleviate it. In markets such as Denver where inventories are at record lows and demand is high, it would take a large number of foreclosures to move the supply needle enough to create a meaningful change in values. I think that is not likely to happen. However, time will tell.
Why Are Mortgage Interest Rates Fluctuating So Much?
The fluctuations we have seen in interest rates in a single week is what we will typically see over the period of a year or two. I’ll do my best to explain something that I’m having a hard time understanding myself.
The Federal Reserve bought billions of dollars of mortgage backed securities in order to drive down interest rates. It worked a little too well and created a double hit on the mortgage banking industry. The easy side of this situation to understand is that this created a huge inflow of new refinances. As a result, the mortgage industry pushed rates up. That slowed the flow of refinances, and allowed lenders to process all the new loans.
But the real problem was not as much the capacity to process loans as it was to stop the flash flood of early pay-offs of relatively young loans. Those were replaced with much lower interest loans.
A large number of earlier than expected payoffs are a problem for the industry. Because investors of mortgage securities calculate a certain number of years of interest to be paid on a loan in order to recover the upfront cost of purchasing note,the cash flow from the loan and eventually profits. So, when the loan gets paid off early, lenders lose the cash flow from the loan but retain the upfront costs of their initial purchase of the loan.
In fact, it is even more complicated than this. Because, in order to safeguard themselves against rate increases, these mortgage investors use hedging instruments. Those, in the face of unprecedented fluctuations in interest rates, have been “called” by the issuer, forcing the mortgage investor or processor to come up with millions of dollars to cover the calls. (Like I said, not an easy teeter totter to understand….or explain!) So, rates effectively were driven down by the Fed. And, then lenders pushed rates back up to compensate. This has vacillated back and forth a few times in a matter of just a few weeks.
The unintended consequences of the Fed’s best intentions created a liquidity problem.
The good news here is that the mortgage industry communicated early and clearly to the Federal Reserve exactly the disaster that was beginning to form in the mortgage world. And, the Fed has already begun to adjust the pace and volume at which it is buying mortgage backed securities. As a result, rates went up and now are slowing back down to the low 3% range for a 30 year fixed loan. But, who know if it could all start over again?
Here’s the $64 question that all the answers seem to be riding on . Just how long will the national shut down last? If the Corona virus contained soon and the country is able to begin normal operations again, then I suspect that the housing market here in Denver will bounce right back to its pre-Corona level. That way, we will see nothing more than a slow down with a fast restart to pre-shut-down market conditions.
That would be ideal but certainly not the only consideration in this entire situation. There are a lot of people in hard medical or life situations. And, many more people are affected financially. Many of those are in the hardest positions in life to recover from either scenario. Some of us are fully employed, healthy, sheltered and just riding out the storm. So, we have the time and resources to help others. We count it as privilege and blessing to lend a helping hand to those who need it.
What’s Important in Life?
We have found many positives to the added time we are spending together as a family. I suspect that ,in retrospect, the current slow down in life will be viewed by many in a positive light. I would even guess that some kids (they have a way of seeing it all different from us adults) will view this time as one of their best memories of growing up. “All of mom’s and dad’s attention was on me.” We played family games and took family walks. My parents worked from home and we had lunch together every day. Mom and dad even became my teachers for a few weeks. And, my dog sat next to me the whole day while I was doing my school work.
Not too long from now, the sun will be shining bright on us all again – Hang In There!