The Tidwell Report

We know that losses (revenue, job/income, and housing loss) have not at all been evenly distributed since the stay-at-home put the brakes on the economy, and we know that Congress postponed an additional stimulus package until after the election. Let’s see whether that happens, but childcare remains a looming issue that is dragging down the economy and is difficult to quantify.

Still, Wall Street is already up over 1,000 points as of this morning so that means investors are more confident about the future of the economy. If this continues, mortgage rates could start rising again as investors sell off risk averse assets like bonds and in favor of risk assets like stocks. Maybe they feel good about the election results or this is the last big runup before a year-end sell off? Nobody knows…

While job growth is slowing, the unemployment rate continues to fall from April’s spike of 14.7% to 6.9%, which was reported last week. As of November 3rd, active forbearance plans continue to trend downward (down to 5.4% of mortgage-holders from 5.7% last week) and is now the lowest we’ve seen since mid-April during the onset of the pandemic, but there have been some who have reentered a forbearance plan after they left their plan so this is something to watch.

Meanwhile, everyone is thinking about moving. Home price growth in Los Angeles continues to soar as record low mortgage interest rates continued to encourage new borrowers to enter the market, which included both new homebuyers as well as homeowners looking to trade up or invest in a second home.

If you know anyone thinking about moving, I can advise on their options and develop a strategy for a successful outcome in this real estate market. See my top arguments below in favor of selling and buying a home in today’s real estate market.

The Argument in Favor of Selling a Home in Today’s Market
The number one reason to sell a home in this market is that Covid imposed an artificial constraint on the current supply of homes for sale (and this created the best time for a seller to take advantage of this scarcity in supply). In fact, a recent report estimated that pandemic uncertainty is keeping 34% of home sellers out of the market.

What does this mean?
Prior to Covid, the Los Angeles real estate market suffered from an imbalance of supply and demand in which demand for housing far exceeded the supply of homes for sale, which produces bidding wars. That plus record low interest rates, which made homes affordable for a larger group of people, created strong upward pressure on home prices in recent years.  In 2020, Covid introduced an artificial constraint on the supply of homes for sale since would-be sellers are not selling their homes, adding more upward pressure on home prices.

Covid simply exacerbated an already existing supply problem and sellers would be wise to capitalize on it! My belief is that Covid has created an extreme scarcity of supply that cannot last indefinitely.  Nobody knows how long this dynamic will exist or whether home prices have room to travel significantly higher, but we can assume prices will be at their highest when supply is at its lowest, such as when this market condition is induced by an artificial constraint like Covid.

If home prices travel higher, a number of home owners have told me they are prepared to list their homes for sale and buy a home in another area for less money (ie. farther from the more urban parts of LA)–this still does nothing for the overall market supply of homes. This dire supply situation may dissipate over time as vaccines come to market so I continue to urge my clients to consider that the window to sell any home may start to close. Of particular concern for sellers should be those homes that have undesirable qualities since the market ascribes a discount factor to these properties and that discount is compressed by the forces that exist in a market such as this.

Examples of properties with undesirable qualities include:

• homes on a busy street or with an alley behind their property, in a neighborhood where crime is increasing or the homeless are taking over.
• homes with an outdated floorplan, with significant deferred maintenance, or that hasn’t been updated to today’s standards.
• homes in less desirable neighborhoods or homes with curb appeal that are negatively impacted by neighboring homes.

The Argument in Favor of Buying A Home in Today’s Market
The number one reason to buy a home in this market is that interest rates are incredibly low and you can build equity.

If you currently own, now is a great time to lock in a long term gain up to $250,000 per person, and to reset the clock on a future gain by selling and buying another property—this is not tax or legal advice but I can refer you to the federal tax provision that covers this in detail.

If you are not yet a homeowner, low interest rates erode the benefits to renting and they make home ownership affordable for many. While there are tax benefits to home ownership, there are a myriad of benefits to owning a home especially in a market like Los Angeles where they cannot import more land to build on…they can only keep building neighborhoods further and further away. Plus, nobody wants to pay someone else’s mortgage and create equity for someone else.

The real estate market could change but nothing, neither a pandemic nor a recession, has slowed it down.  Home prices could grow another 5-10% in 2021, and even if we get a vaccine it is still likely that the real estate market will still feature more demand than supply even after the artificial constraint fully lifts. And as interest rates begin to increase, your purchasing power decreases.

Not until supply exceeds demand will we see home prices drop.  Some argue about an impeding boom in foreclosures resulting from homeowners who lost their jobs and took Covid bailouts. Maybe but if it does happen, I do not see it happening any time soon.  The bottom line is that if people have jobs, they will continue to buy and sell homes. Prices will come down if there is a huge spike in unemployment that is sustained through a down economy particularly among people who already own homes.

Everyone will tell you that the best time to buy was yesterday, 1 year ago, 5 years ago, etc.  They say that because you cannot predict what direction things will go in. At the moment, there is some consensus that we will see inflation and rising asset prices for things like real estate.  If that happens, who knows where this market will go.

UNEMPLOYMENT
*October Job gains beat expectations*
The Department of Labor Statistics reported that:

• The U.S. economy added 638,000 new jobs in October.
• The unemployment rate dropped to 6.9% in October from 7.9% in September.These numbers beat analysts’ expectations of 530,000 new jobs and an unemployment rate of 7.7%.
• It should also be noted that private employers added 906,000 jobs, but 268,000 government jobs were lost in October. That included 147,000 census workers that were hired to complete the census count, which is now concluded.

U.S. EXISTING-HOME SALES
*soared in September* 
The National Association of Realtors reported that:

• Existing home sales in September rose 6.4% month-over-month from August and rose 21% year-over-year from the number of homes sold in September 2019.
• The median price paid for a home increased 15% from one year ago.
• The inventory level in the United States was 1.47 million homes, a 2.7-month supply. That is a record low.

FORBEARANCE
*Down to 5.4% from 5.7% last week*
According to BlackKnight, Inc., nationwide forbearance volumes have fallen by 152,000 (-5%) since last Tuesday, driven by October forbearance expiration activity. This was roughly what was expected for the first week of the month, though we will be on the lookout for further potential drops, given the remaining scheduled expirations. With some 161,000 active forbearance plans having expired at the end of October, additional extension and/or removal activity could be seen in coming days.

As of Nov. 3, there are 2.9 million active forbearance plans, representing some 5.4% of mortgage-holders, down from 5.7% last week and the lowest we’ve seen since mid-April during the onset of the pandemic. Together, they represent $584 billion in unpaid principal.

There were 87,000 starts over the past week, but 57% of these were repeat starts for borrowers who had previously been in forbearance, left their plans, and have since returned. These forbearance starts and restarts are worth watching, as we see them trending upward. It may well be that this is still due to the drop in early October, but given the rising trend, they warrant a close eye.

STOCK MARKETS
*posted their highest weekly gain in six months*
Stock markets soared this last week erasing most of their losses suffered over the last three weeks. Strong data outweighed COVID concerns as investors pushed up stock prices. Retail sales, housing sales, industrial output, and corporate earnings all exceeded expectations.

By The Numbers:

• The Dow Jones Industrial Average closed the week at 28,343.40, up 6.9% from 26,501.60 last week. It’s down 0.8% year-to-date.
• The S&P 500 closed the week at 3,509.44, up 7.3% from 3,269.96 last week. It’s up 8.6% year-to-date.
• The NASDAQ closed the week at 11,895.23, up 9.0% from 10,911.59 last week. It’s up 32.6% year-to-date.

U.S. TREASURY BOND YIELDS

• The 10-year treasury bond closed the week yielding 0.83%, down from 0.88% last week.
• The 30-year treasury bond yield ended the week at 1.60% down from 1.66% last week.
• We watch bond yields because mortgage rates often follow treasury bond yields.

MORTGAGE RATES
The November 5, 2020, Freddie Mac Primary Mortgage Survey reported mortgage rates for the most popular loan products as follows:

• The 30-year fixed mortgage rate average was 2.78%, down from 2.81% last week.
• The 15-year fixed was 2.32%, unchanged from 2.32% last week.
• The 5-year ARM was 2.89%, almost unchanged from 2.88% last week.

Have a great week!

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