COVID + Residential Real Estate?

How to avoid signing your life over to a mortgage
SustainableHappiness
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Joined: Tue Jun 28, 2016 6:39 pm

COVID + Residential Real Estate?

Post by SustainableHappiness »

Since this forum seems to have a knack for interesting data points, please help. We are in the process of looking for a long term house to purchase in Ontario, Canada.

I'm convinced that although mtg rates dropped recently in the states, watching what happened in the Chinese housing market (crickets and massive drop in home sales), makes me think a similar thing (i.e. a short-term cooling) will happen for residential real estate across the majority of markets. If we can buy in the atmosphere of fear, we may find a deal (although it makes me queezy when I realize that is betting on the continued spread of fear and the virus).

Thoughts?

I've been unable to find any real-time data points that may indicate something like this happening, except in China. Any indicators in the US so far, any idea where to keep an eye out in Canada or US?

Thank you in advance!

wolf
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Re: COVID + Residential Real Estate?

Post by wolf »

The S&P/Case Shiller US National Home Price Index is lagging about two months, nevertheless it could give you an indication in the following months.

BMF1102
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Re: COVID + Residential Real Estate?

Post by BMF1102 »

In my area, southwest Michigan, I have not noticed a drop in home prices over the last couple months. In fact most homes priced fairly, even a little high, are selling within a couple days currently. I have just locked an interest rate of 3.375 down from 4 just about a week ago though. I'm hoping it holds together long enough to sell my current home.

Lucky C
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Re: COVID + Residential Real Estate?

Post by Lucky C »

Note that amid the gigantic housing crisis + GFC it took 5.5 years for housing prices (per Case Shiller index) to fall from peak to trough. Check back in 2025.

ertyu
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Re: COVID + Residential Real Estate?

Post by ertyu »

my theory:

covid will hit in the spring, early summer.
a little after it hits, the "real estate season" starts - at least here, sales are stronger in the warmer months.
people will try to keep prices high for a while.
then at the end of this year's real estate season, they'll figure out they can't sell, and if they are stubborn, they'll need to wait until the following summer. That's when they'll cave in.

Tl;dr: go on the market in late october - november 2020. The stock mkt should be in a right state by then, too :D

Seppia
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Re: COVID + Residential Real Estate?

Post by Seppia »

Housing is slower to react VS the stock market because prices “stick”.
When selling, people tend to list for a certain price, and if it doesn’t sell they usually wait some time, then lower (but maybe not enough so the same cycle repeats).
I’ve seen people with a house on the market for a few years.
Last time I checked prices in Ontario were completely insane relative to rent and average yearly salary, so I wouldn’t be looking to buy regardless.

tonyedgecombe
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Re: COVID + Residential Real Estate?

Post by tonyedgecombe »

I might not be so sticky if you are selling grannies house for the inheritance.

bigato
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Re: COVID + Residential Real Estate?

Post by bigato »

tony: i think it may be even worse in those cases, because you frequently will have more than one heir to agree on decreasing the price.
Real estate prices have a lot of inertia.

classical_Liberal
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Re: COVID + Residential Real Estate?

Post by classical_Liberal »

+1 to what @bigato stated

Housing prices are tightly coupled to local income. So, for housing prices to drop, you need recession, then layoffs (ie decrease of local income base). Of course they are also tied to long term rates because people buy a payment, not a price.

bostonimproper
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Re: COVID + Residential Real Estate?

Post by bostonimproper »

My mother's a real estate agent in the Southwest. She's seeing a lack of inventory, which I imagine will only continue in the coming weeks. I doubt prices will plummet due to coronavirus unless there end up being a large number of fatalities leading to estate liquidations, or we go into a recession and folks start losing their jobs. 2008 recession aside, real estate prices are usually a lagging indicator. Even then, I think it'll be a gradual decline, if one at all. Home prices are pretty sticky.

OTOH, my REIT allocation is doing pretty awful right now, so who knows.

SustainableHappiness
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Re: COVID + Residential Real Estate?

Post by SustainableHappiness »

Seppia wrote:
Sat Feb 29, 2020 11:50 am
Last time I checked prices in Ontario were completely insane relative to rent and average yearly salary, so I wouldn’t be looking to buy regardless.
Depends on where you are in Ontario. I.e. not the Greater Toronto Area = about half the price. Also, rents have also been increasing >10% per year in many areas.

Also, a partner who would feel much more comfortable owning vs renting must be taken into account.
Lucky C wrote:
Sat Feb 29, 2020 10:30 am
Note that amid the gigantic housing crisis + GFC it took 5.5 years for housing prices (per Case Shiller index) to fall from peak to trough. Check back in 2025.
Completely different type of crisis, no?

I'm think if we pretend that bargains right now are to be had in 5% of deals, that the percentage of possible bargains will increase as weird situations arise. We aren't in a rush and are waiting for the right place (location location location, walkability = paramount), so we'll see what happens.

Lucky C
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Re: COVID + Residential Real Estate?

Post by Lucky C »

Now I'm curious about the 1918 Spanish Flu, maybe a better comparison, certainly a more similar crisis. Peak of Spanish flu was the 2nd wave in the autumn of 1918. This coincided with the start of the post-WWI recession which according to Wikipedia was due to low production and higher unemployment due to the end of the war, with the Spanish Flu not being mentioned as a factor. Then it was quickly followed by a 1920-1921 recession before the Roaring 20s started to turn things around.
https://en.wikipedia.org/wiki/List_of_r ... ted_States

Now check Shiller historical home price data for that time. Copied data from the relevant time period below.
http://www.econ.yale.edu/~shiller/data.htm

Year Real Home Price
1915: 88.1487638
1916: 93.72485165
1917: 85.00903742
1918: 75.56662106
1919: 70.51379536
1920: 66.07414907
1921: 65.61430848
1922: 74.79619714

So home prices were already on their way down in from the 1916 high to 1917, then in 1918 there was the Spanish Flu + recession sending prices down into 1919, and then the 1920-1921 recession sent prices lower still.

1916 to 1921: 30% inflation-adjusted price drop over 5 years
2006 to 2012: 35% inflation-adjusted price drop over 6 years

Looks like those are the only comparable big drops in the Shiller data. Maybe other countries have had more significant pandemic + housing crash episodes.

Of course this time there could be other factors that drop prices more significantly, but I wouldn't bet on prices dropping more than a third or faster than a few years based on history.

Lucky C
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Re: COVID + Residential Real Estate?

Post by Lucky C »

But locally you could get lucky and find a spot that is particularly hard hit if you want to live there. I remember during the housing crisis certain places dropped more like 50% and it certainly seemed to drop faster than in five years.

Lucky C
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Re: COVID + Residential Real Estate?

Post by Lucky C »

Thinking about this some more, imagine how Average Joes view changes in real estate prices vs. changes in stock prices. If a home price is cut 10% from say $300k to $270k then it will look like a great value and there would be many buyers interested in buying to "save" $30k. But if a stock rapidly drops from $30 to $27 most Average Joes wouldn't want to touch it!

Obviously housing prices are complicated but the point is I think buyer psychology has a lot to do with how home prices have more inertia compared to stock prices and other economic metrics.

bigato
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Re: COVID + Residential Real Estate?

Post by bigato »

I did a lot of research on local real estate last year. I’ve seen people cling to the price they paid 10 years ago even when my offer was perfectly fine for the market. I’ve seen heirs refuse to let mom sell an apartment for a reasonable price or even negotiate, while the place was trashed and would require some fixing up. On the renting side, I’ve seen an owner refuse a whole year of rent paid upfront because he wanted someone else to sign the contract with me instead, as a guarantee. Even when I have a very stable job, for 18 years, at a company that is 200 years old, and I make twenty times monthly rent every month.

So let me tell you, real estate prices can be far, far from being a rational prices. Most people are not traders of anything and they will just buy or sell real estate once or twice in their lives. They are far from experts. Plus, the attachment is very emotional and intense. Additionally, the few really good deals are monitored and explored intensely by real estate moguls that have far deeper pockets than you. You can’t compete.

I could imagine some drop if we were to see say, 30% of people over 70 years old dying in most places. Other than that, don’t count on this market being efficient nor rational.

classical_Liberal
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Re: COVID + Residential Real Estate?

Post by classical_Liberal »

Here's the US historical home price to median income. It stays reasonably consistent showing how home prices move with income.

https://www.longtermtrends.net/home-pri ... ome-ratio/

It would also be interesting to overlay a 30-yr fixed mortgage rate, again, because people buy payment, not price. It would probably even out more. Changes in available financing options also impact payment (ie interest only, or 40+ year loans, lax lending standards, see early 2000's run up).

The thing with residential real estate is that it's hyperlocal. So while info like this is helpful to see trends, it doesn't really help with individual transactions in specific areas. One could, however, infer that median prices below, say 3.5X local median income indicates a particular market is undervalued. Even more so if median wages in that area are increasing above the national average. Interest rates are important though, and so is the median income trend of the locality. Shrinking wages means the market will be in trouble, eventually. Median income change in real estate is almost like earnings in equities. Lending environment is like the corporate bond market.

tl;dr Look at local economy, median local income vs home prices, and factor in the current low rate & lending environment.

Jason
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Re: COVID + Residential Real Estate?

Post by Jason »

Bailout did not extend to non-bank lenders i.e. Lending Tree. Mortgage services still have to come up with cash despite homeowners being granted relief. No regulation is great until you need it.

https://www.washingtonpost.com/business ... ronavirus/

bostonimproper
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Re: COVID + Residential Real Estate?

Post by bostonimproper »

Bloomberg:
About 300,000 borrowers whose mortgages are backed by Fannie Mae and Freddie Mac have requested forbearance as of April 1, according to the FHFA.
Personal commentary: Lenders hitting liquidity issues may push them toward harsher repayment plans, after the required 90 day forbearance.

Forbes:
The correspondence left it unclear that those 90 days should be considered an initial period, which financially strained borrowers can later stretch up to a full year in accordance with the CARES Act. In the last several days, Twitter TWTR filled with comments from customers of major lenders that underline this lack of clarity.

“I contacted Bank of America BAC for forbearance and they granted me a 3-month program; at its completion July 1, I will have to pay them $12,000 [or the] equivalent of [four] mortgage payments,” a person wrote on the social media platform. “If I can’t pay it now, where am I going to get 4 months’ worth. I’m glad [you are] looking out for us.”
US specific info, obviously. Not sure how this would affect Canada. Back of envelope calculations: here we have about ~70 million mortgages, sales turnover on average 7.5% yearly means around 5.25 million sales normally. So if banks try to foreclose on everyone in forbearance for failing on immediate repayment in order to forestall their liquidity issues, we're looking at +6% of average annual listings coming up for short sale in July. Which is a lot, but certainly less drastic than unemployment numbers if we take that month by itself. The question is what happens when we look at economy being on shutdown for multiple months.

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C40
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Re: COVID + Residential Real Estate?

Post by C40 »

I don't have anything to add, but I'm highly interested in this, as I currently expect to buy property in the next 0.5 to 4 years.

Seppia
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Re: COVID + Residential Real Estate?

Post by Seppia »

One thing to consider:
The economic pain will be felt much much quicker than usual this time.
10m unemployed people in the last two weeks means 10m people who will likely have trouble paying rent / mortgage very soon.
Some may be forced to sell at any price in the somewhat near future.
Also to be considered: whenever a vaccine comes (let’s say 12-18 months?) the world is going to go back to normal almost immediately.

So if I had to pull an opinion of of my a$$ I would say there will be a few incredible bargains but we will likely not have enough time to see the widespread price fall we saw a couple years after the GFC hit

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