Corona vs. Your Real Estate Investment – 2008/2009 Again?
I hope you are staying well and trying to keep a positive attitude, but I know that’s easier said than done. The uncertainty out there is difficult to digest, and in all the wrong ways it’s very familiar. It reminds me of the 2008 financial crisis without the benefit of hanging out with friends and extended family to try and make things feel a little bit better.
That said, there is a silver lining for both home sellers and buyers that makes this crisis much different than 2008.
First, homeowners have more untapped equity in their properties than ever before, up 150% from 2009, which begs the question, what if current home prices fall?
In the crisis of 2008/09 home prices fell an average of 35%. That put the average homeowner under water because they had less than 35% in equity at the time, which accelerated the momentum of falling prices as some homeowners were forced to sell into the bottom of the market via short sales and bankruptcies. It was a recipe for disaster and why prices fell so dramatically.
Fortunately, the fact that homeowners have 150% more equity now than they did in 2009 will help stabilize home values as we navigate through yet another crisis. In other words, if sellers had 25% in equity on average in 2009 then they have about 38% in equity now, which is a much, much better position to be in and will protect homeowners against potentially lower prices.
This leads to another question, should we expect home prices to fall? It depends on mortgage rates, which will be relatively important in determining what happens to home values over the next few months.
Last week, mortgage rates were very low, well below 3% for a fixed rate, 30 year conventional loan. That was an incredible opportunity for buyers.
However, this week started out telling a very different story. Mortgage rates were skyrocketing relative to where they were only a week ago. That’s because the US 10 Year Treasury (US10Y) yield was exponentially higher compared to its low on March 8th (under 0.50%). For comparison, the US10Y yield closed over 250% higher on March 17th (1.26%) than it was on the 8th (0.50%). That’s an insane jump, which was a direct reaction to the news of a multi-billion dollar stimulus package that would be passed by the Senate on the following day, Wednesday, March 18th.
Since Wednesday, the US10Y yield has fallen back down to under 0.85%, a 70% drop from the high on Tuesday the 17th. It’s not as low as it was on the 8th, but it’s heading in the right direction.
This means that mortgage rates will start to drop again, which will further support home values (a silver lining for both buyers and sellers).
So, a long story made even longer, the signs seem to be telling us that both the average home buyer and seller can feel good about their decision regardless of whether they are deciding to buy in today’s market or to sell.
I hope that this relatively good news makes your day a little bit better as you hunker down at home. It’s important that we put whatever we can into context and keep our heads on straight.
So be well, stay positive and carry on.