Rents, mortgages, and mortgage applications are key indicators for the health of the residential real estate market. As the battle against the virus roars on and the economy begins taking baby steps towards reopening, here are some of the first numbers showing what is in front of the industry.
The impact of the CARES Act is being felt all across the residential real estate sector. Everything from delayed stimulus payments, to eviction moratoriums, to missed mortgage payments is having an effect. The CARES Act allows homeowners with government back loans to delay up to a year’s worth of payments. Government back loans make up about 75% of all current mortgages with many banks and private lenders also offering forbearance programs.
As the COVID-19 casualties mount, the number of Americans filing for the government’s bailout program is increasing at a rate of about half a million every week. As of May 1, the government backed mortgages impacted were 6.1% of all loans from Fannie Mae and Freddie Mac along with another 10.5% of all FHA/VA loans. Additionally, an unknown number of homeowners are simply delaying mortgage payments.
Where this is leading is uncertain at the least. As of now, missed payments must be made up later through either repayment plans or mortgage modifications. However, with a half-trillion dollar bailout for major corporations, the calls for mortgage forgiveness can be expected to grow in volume.
How much difference can one month make? According to a snapshot survey conducted in mid-April by Grace Hill in partnership with Apartments.com and release April 28, the number of renters doubtful they could pay their full May rent doubled from the number confident of paying full rent in April.
Out of 25,000 surveyed renters, 27% said they would not pay rent in May or only make a partial payment. Another 25% were not sure if they could pay the full or partial rent. Only 52% were confident of paying rent in full sometime during May. In comparison, only 20% of renters reported difficulty making the rent payment in April. One month has changed everything in the rental market.
Compounding the fast deteriorating financial situation is that about 66% of renters reported income loss during April and 48% said the income loss was major or devastating. The survey covered the full spectrum of renter profiles and multifamily properties. Although not broken down by demographics such as income, job type, or education level, the sheer numbers indicate rents will not be paid across a wide swath of the economy.
Much of the decline in not being able to pay the rent is attributed to less than 50% of Americans receiving CARE Act stimulus payments in April. Of those not able or not sure about paying their rent, 75% had planned to use their stimulus payments.
Going forward, the picture for future rent payments is questionable because calls for rent strikes are beginning to take hold across the country. The day before May rents were due (April 30), tenant groups across the country called for a rent strike until the economy recovers. In NYC, 50 buildings have already formally organized to withhold rents with an uncounted number of individuals doing so informally. Rent strikes are also already organized across the country from Chicago, to Los Angeles, to Seattle. It’s believed to be the largest organized rent strike in more than a century.
Where this ultimately goes is very uncertain given that the CARES Act is halting evictions nationally for tenants in federal housing programs and wherever underlying mortgages are backed by a federal housing agency. In at least 20 states, all evictions have been put on hold. In an interview with Public Broadcast System, Rep. Alexandria Ocasio-Cortez (D-NY) said, “People aren't striking because they don't feel like paying rent. People are striking because they can't pay rent. They can't.”
With 30-year mortgage rates in the low 3% range and 15-year mortgages dipping below 3%, expectations were for refinancing to be on the upswing. Surprisingly, the last week of April saw refinance demand fall while applications to buy homes rose. Refinancing did remain the strongest portion of the mortgage market at 71.6% of all applications (218% higher than last year). The uptick for homebuyer applications was 12% but remained 20% less than last year.
The increase in homebuyer applications indicates improving buyer confidence that is further supported by some listing websites, real estate brokers, and builders saying they are seeing higher buyer activity (although comparable time frames vary). But the hard fact is that total mortgage application volume fell by 3.3% in the last week of April. Going forward, there also appears to be a growing move towards lenders limiting or not offering some mortgage products because of the possible consequences associated with the mortgage bailout program.
Heaping more negatively on residential housing (and every sector of the economy) is the unemployment outlook. The soon to be released unemployment numbers are expected to be the equivalent of eliminating every job created during the past 10 years. The U.S. Department of Labor projects the seasonally adjusted insured unemployment rate is 12.4 percent for the week ending April 18. Many widely accepted estimates are that the unemployment rate is heading for approximately 32% with another 67 million people already at high risk of layoffs.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].