How the housing market’s V-shaped recovery could slip into a W-shape

Life comes at you fast and you better be ready to handle any curveball that gets thrown your way.

The curveball I’m talking about is the increase in COVID-19 cases we are seeing in many states, including my state of California. The significant uptick in many areas following the relaxation of stay-at-home orders forced some governors to scale back the reopening of the economy. 

Logan Mohtashami
Logan Mohtashami

Previously, I wrote that the first hurdle we as society would need to conquer in order to get the economy back on track was to flatten the curve of new infections. Slowing the spread of COVID-19 is the first of many steps required to revitalize the economy. 

In April and May we were on the verge of success, then some of us –– in fact, way too many of us –– got sloppy. The relaxation of stay at home orders was accompanied by relaxation of common sense. In Texas, Arizona, Florida and California, we weren’t careful, and now virus infection rates are rising. 

Prior to this setback, the U.S. economy wasn’t exactly in full swing, but we were making some progress. Most notably, the U.S. housing market made a full V-shaped recovery. This is based on four straight weeks of the highest levels of double-digit growth in purchase applications in 2020. Now with higher infection rates back in play in many areas, we need to entertain the possibility that our victorious V-shaped recovery in housing may turn into a “W-shaped” recovery.

What we need to avoid the W-shape

In order to avoid a reversion of our progress and hold on to the recovery in housing, we need to see the following four things: flat to positive purchase applications, flowing credit, stable bond yields and control of the infection rates, again. 

1.  Flat to positive purchase applications

We need to have flat to positive, year of year growth in purchase applications for the rest of the year. Typically, total volumes of purchase application fall after May which is why we need to focus on the year over year comparison rather than look at month to month comparisons. The recent 18% and 21% year-over-year gains are robust, so sustaining this level of growth is not likely.

Considering our current situation, I will be happy with any growth in purchase applications compared to last year. In the early months of the COVID-19 crisis, purchase applications were negative year over year by  11%, 24% and 35% before stabilizing and heading higher.

2. Credit Flow

Credit needs to be flowing for a functioning housing market.

Frankly, we got lucky that Freddie Mac and Fannie Mae were not out of government conservatorship when the virus hit. Because the GSEs still have the government backstop, the major pipeline of credit for home purchases continues to flow, despite economic chaos elsewhere. 

The government forbearance plans, too, provide a safety net for American homeowners who lost employment due to the crisis. If the GSEs were publically traded companies with no government backstop, credit standards would have become much tighter and there would be no mortgage deferment programs offered, at least not quickly.

Under our current crisis conditions, the GSEs would be at high risk for failure and the government would likely be forced to take them back in conservatorship. We were able to handle the March mortgage market meltdown with only a few casualties in the non-qualified mortgage market, the jumbo market and for low FICO score FHA loans.

3. Target 10-year yield rates

The one area we don’t need to worry about is mortgage rates. Mortgage rates are going to be low or at least below 4.5%, the level that begins to affect demand, for some time. For the 10-year yield, however, I would like to see higher yields because this would indicate that the economy is improving.

A 10-year yield above 0.62% bodes wells for the future. However, if yields go lower than 0.62%, then the bond market is expecting more economic drama. I put the recessionary yield range between -0.21% and 0.62%, whereas yields above 0.62% indicate that the bond market has confidence in the future. 

4. Decrease in COVID-19 cases

Back in February, I predicted that we would flatten the curve of new infections by May 18, which we did. I am now predicting that we will get this rebound of infection rates under control before September 1. This will require a lot more testing and common sense. 

If we all work together we can be in a better place by September 1 -– and this is critical because we need to be ready for the second wave that could hit in the winter months.

A  resurgence of infections nationwide with no concerted efforts to lower the rate of growth of cases could significantly impact our recovery. If the virus infection rates do get worse and stay at home orders are reenacted,  credit could tighten and purchase applications could fall, year over year.  We may not be able to sustain our V-shaped recovery in housing. 

If that happens then our best-case scenario would be to work towards a W-shaped recovery.

Early signs of a W-shape

If fear of the virus prevents buyers from looking and sellers from putting homes on the market, our V-shaped recovery in housing could be in jeopardy. Our good demographics and low-interest rates mean we should have baked-in demand for housing. But this demand can be quashed by buyer and seller fear.

If real estate professionals follow safe practices, there is no reason why homes can’t be shown for sale and transactions executed safely. Our industry has a responsibility to make this known.

Also of concern, in the last two weeks, we have seen an increase in the Financial Stress Index to 0.21%, indicating a loss of confidence by the markets in the U.S. economy. 

This might result in more tightening of credit which was actually getting slightly better recently. We need to see the St. Louis Financial Stress index go back to zero or negative to know that we are in recovery mode.  We don’t want to see this index get above 1.21%, because if it breaks past 1.21% then typically it has the potential to rise quickly. 

625 Stress Index short

Mortgage rates to the rescue

On the bright side, we also have the potential for the stock market and economy to recover relatively quickly. This is because even though the economy is suffering, we do not have a consumer credit bubble. Plus, inflation is low, we have a fiscal capacity to provide disaster relefi and we have good demographics.

America was enjoying the longest economic and job expansion ever recorded in history because it had millions and millions of people of prime working age wanting to consume goods and services. This virus is the one thing that has the ability to obliterate that advantage.

Even with the virus and the job losses and the shutdown, we have over 133 million people working.  Perhaps because of this, the U.S. housing market is the single most outperforming economic sector in the world today.

The virus can cause a lot of damage to the economy in the short term, (like it did in March and April, resulting in the sharp decline in purchase application data), but it cannot defeat us. 

Because the primary drivers of housing are demographics and mortgage rates (and we have those two things in spades), all we need to show the full potential of years 2020-2024 is to be in good health, work and walk to earth freely. 

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Source: HousingWire Magazine

Comment on Reconsiderations of Value and What to Do About Them by John Dorie

This appraiser, like most appraisers, believes the assignment is complete when the report is submitted. NO! The assignment is complete when the report is ACCEPTED by the lender.

Let’s look at a similar scenario — You are buying a new computer for your appraisal business and purchase it from a computer store. When you take it home and unbox it you find the screen is cracked. What did you do? Well, you take it back to a replacement. The deal is not done when you walk out of the store; the deal is done when you ACCEPT the new computer.

Source: Working RE Magazine

Should we ditch open houses?

open house sign

The value of open houses is up for debate these days with Realtors either very much in favor of them, or totally opposed to them. There’s not much in between, if reader response to a recent query from our Chief Product Officer, Diego Sanchez, is any indication.

Once upon a time, open houses were the only way people who did not have relationships with real estate agents could freely tour a home without making an appointment.

The rest of this content is for HW+ members. Join today with an HW+ Membership! Already a member? log in

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Source: HousingWire Magazine

Banks 'not getting a ton of interest' in Main Street program: Powell

Federal Reserve Chairman Jerome Powell said about 300 lenders have signed on to the program and that the central bank is committed to making adjustments that could attract more borrowers.
Source: American Banker

COVID-19 pandemic delays efforts to transition away from LIBOR, Moody’s says

The COVID-19 pandemic has slowed the transition from the London Interbank Offer Rate, or LIBOR, an interest-rate benchmark once known as the world’s most influential number.

Some loans and other instruments are still being written using LIBOR as an index for the interest rate, adding to the legacy stock of financial products that will have to be dealt with when benchmark expires at the end of 2021, according to a Tuesday report from Moody’s Investors Service. The pandemic has slowed efforts to transition to another benchmark, the report said.

“The global coronavirus crisis is only delaying solutions to LIBOR’s end,” the report said. “For many market participants, addressing liquidity needs has been a higher near-term priority than addressing their existing LIBOR exposures or launching non-LIBOR initiatives.”

LIBOR is being phased out about a decade after regulators discovered traders were manipulating the rate set by Britan’s biggest banks. Before details of the scandal were unveiled by investigative journalists, LIBOR was the most popular index for U.S. adjustable-rate mortgages.

LIBOR currently is used in the U.S. for about $267 trillion of derivatives and other securities, according to the International Monetary Fund. That’s 14 times the size of the U.S. annual gross domestic product.

“The continued reliance on LIBOR poses risks to financial stability, which can be fully addressed only through a timely transition to alternative risk-free reference rates,” the IMF said in an October report.

U.S. regulators have been working for years to replace the rate with another benchmark such as the Secured Overnight Financing Rate, or SOFR, which tracks the U.S. Treasury’s repo market where investors offer banks overnight loans backed by their bond assets.

The COVID-19 pandemic has done more than just slow those efforts, the Moody’s report said. Regulators such as the Federal Reserve have increased the nation’s reliance on LIBOR by using it as an index for emergency lending, the report said.

“Despite consistently pushing to drop LIBOR, officials across markets have used the benchmark in some coronavirus-spurred relief lending schemes,” the Moody’s report said.

“For instance, the U.S. Fed used LIBOR for its $600 billion Main Street Lending Program, citing feedback from potential participants that quickly implementing new systems to issue loans based on SOFR would require diverting resources from challenges related to the pandemic,” the report said.

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Source: HousingWire Magazine

ALTA, MBA and NAR draft emergency remote notarization act

Together with the Mortgage Bankers Association and National Association of Realtors, the American Land and Title Association drafted a model emergency notarization act calling for the uniformity and legal certainty of remote notarizations.

The draft, intended to be signed and enforced by state governors, proposes the state’s legal protection of remote notarizations to preserve the public’s health and wellbeing in light of COVID-19. The order says the use of electronic documents and virtual communications satisfy the legal requirements of notarizations.

The draft’s text to be issued by governors, reads: “In order to provide citizens and businesses with a secure, safe, and legal method by which to execute important legal documents for the duration of the State of Emergency in my proclamation/executive order, providing an alternative to the in- person physical presence requirement under the current notarial process is a necessary measure to combat the COVID-19 emergency,” the order said.

ALTA’s support of RON was evident at the beginning of the pandemic when ALTA CEO Diane Tomb expressed her support for the SECURE Notarization Act, which would authorize every notary in the United States to perform RON.

As the SECURE Act is currently sitting at the introduction phase in Congress, ALTA, the MBA and NAR drafted a letter to state governors and secretaries of state pitching the proposed emergency notarization act for state enforcement.

“As we now look to the future and reopening our economy, there will continue to be a need for social distancing, especially for those at most risk from COVID-19. In light of that, the undersigned associations urge you to continue your support of the use of remote appearance for notarizations, and to ensure these temporary measures protect consumers and provide legal certainty,” the draft letter said.

According to a report by the National Notary Association, each state’s guidelines for remote notarizations vary from permanent RON laws, to temporary emergency remote authorizations. However, the combined association’s model emergency notarization act intends to perform as uniform legislation across the U.S., according to ALTA.

The model’s announcement coincides with ALTA’s recent development of principles that it says, “represent its vision for the future of remote notarization systems.”

On Thursday, ALTA released the principles outlining guidelines on digital technology options, safeguards, fraud reduction and protection of property rights in regard to remote notarizations. The principles also state remote notarizations must meet certain criteria to provide confidence in the transfer of real estate.

“Due to the COVID-19 health crisis, the need for digital transactions and use of remote notarizations has increased. We believe our principles provide a strong foundation for the use of various types of remote notarizations going forward,” said Tomb.

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Source: HousingWire Magazine

Dodd-Frank has softened blow of pandemic, its authors say

Chris Dodd and Barney Frank said the legislation — nearing its 10th anniversary — put banks in position to be a stabilizing force during the coronavirus crisis.
Source: American Banker

Pack of regionals can satisfy stress tests with minimum buffer

Six of the eight regional banks that announced their stress capital buffers on Tuesday said they will need just a 2.5% cushion to weather an economic downturn. All eight said they’ll keep their dividends steady.
Source: American Banker

As PPP enters forgiveness phase, some banks see outsourcing as best move

Lenders are selling their Paycheck Protection Program loans or hiring outside companies to navigate the process in an effort to reduce risk and avoid overloading their employees.
Source: American Banker

Inside Real Estate announces acquisition of dashCMA

Real estate tech provider Inside Real Estate has acquired modern pricing tool dashCMA.

Inside Real Estate says they expect dashCMA to simplify the process of creating and presenting a comparative market analysis by delivering key data points quickly.

This acquisition opens access to over 600 MLSs, covering nearly 99% of all listings across the U.S. and Canada, for dashCMA.

“We are thrilled to welcome dashCMA into the Inside Real Estate family,” said Ned Stringham, CEO of Inside Real Estate.

“Karen [Abram] and the entire dashCMA team have done a fantastic job creating a product that helps real estate professionals do more business, more efficiently – a core value we are very much aligned on,” Stringham continued. “We look forward to integrating dashCMA into our ecosystem to provide even more cutting-edge technology to our clients, and to expand its reach across our growing footprint of top agents, teams and brokerage partners.”

Inside Real Estate said that dashCMA’s availability will expand rapidly to most major markets, with the solution available for purchase as a standalone product offering to brokerages.

In the next few months, this solution will be integrated into Inside Real Estate’s flagship platform kvCORE, an end-to-end platform for brokers and agents, and will be made available for purchase within the kvCORE Marketplace.

“dashCMA ups the game for real estate professionals to deliver highly compelling presentations and ensure no deal is ever lost over pricing,” said dashCMA founder Karen Abram. “I’m beyond excited to join the Inside Real Estate family where, together, we can expand the reach of dashCMA exponentially, helping even more real estate professionals achieve success.”

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Source: HousingWire Magazine