Disclaimer: Please note, views expressed in this email are of my own and not affiliated with Interlaken Real Estate. The content is for informational purposes only, and you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
I hope everyone is staying safe and healthy during this incredible time of uncertainty. Every day we face a barrage of bad news causing many of us to feel overwhelmed, questioning our financial future. In lieu of the government printing trillions of dollars on a bi-weekly basis to stimulate the economy, I (along with many others) believe that we are at the forefront of a paradigm shift that will benefit hard assets more than any other asset class.
Real estate is considered a hard, tangible asset. Most financial advisors and economists expect hard assets to be one of the best performing asset classes over the next decade in the face of unlimited quantitative easing. Similar to gold, real estate is a tangible good that has a fantastic track record of holding its value.
Looking Forward (Short Term, Midterm, Long Term)
While I am certain we will see some volatility short-term (3-6 months), most economists and housing experts believe we should begin to see a full recovery in all markets by the end of the year and into Q1 2021. My assumption is that the best deals will start to surface in Q3 and Q4 of this year. By July, the majority of homeowners with jumbo loans that deferred their mortgage payments beginning in April will be obligated to either start paying once again or look for a potential sale. Conforming loan holders now have the option to defer any missed payments till either loan maturity, refinance, or sale. Over a longer time frame (3-5 years), I expect residential real estate to continue to outperform most asset classes.
Which Residential Markets Will Get Hit the Hardest?
I expect coastal areas (California, Washington, and NY) with high-density housing and new construction homes to get hit hardest, given higher prices and tightening lending standards. JP Morgan, along with Wells Fargo, has both tightened their lending standards for their jumbo loans to require all borrowers to have a FICO score of 700+ and 20% down to qualify for a home loan with an attractive (3-4%) interest rate. Individuals with less than 20% will be subject to much higher interest rates. Either lending requirements will have to loosen, or prices will have to come down for the average homeowner to have the same borrowing power as they had in years past.
Individual homeowners nationwide that will be most affected by the current crisis will be FHA home buyers that bought within the past two years with credit scores below 620. Within that sector is where we can expect more significant jobless claims this year. We can expect the current administration to implement as many policies as possible to keep foreclosures to a minimum.
What Does This Mean for Lake Tahoe, NV Residential Real Estate?
Typically, second-home markets get hit hardest in a recession. However, with the increase in demand from California residents looking to escape higher taxes, the low supply of homes on the Nevada side of the lake, and a corporate push for more remote working conditions, I don’t foresee a significant increase in the housing supply and a decrease in sale prices. In addition, I firmly believe we’ll see homeowners who have been locked in their homes in crowded suburban areas look to acquire second homes in Lake Tahoe with the fear of another pandemic on their minds.
Will Residential Real Estate Continues to Hold Its Value Relative to Other Asset Classes?
Below are a few reasons why I believe residential real estate will hold its value relative to other asset classes throughout and after this next recession.
- Demographics - The Demographics in the United States are extremely favorable towards an increase in home buyers. At this point in time, we have the largest demographic of 27 to 36-year-olds in US history.
- Selling Equity - With the surge in housing prices over the past decade, many homeowners have nested equity, meaning that the chances of a default are slim.
- Interest Rates - Interest Rates Will Remain Low (if Not Decrease) Given how Low the Ten Year Us Treasury Yields Are. I Would Not Be Surprised if The Current Administration demanded lower mortgage rates to stimulate the housing market. Lower interest rates mean buyers will have more purchasing power.
- Quantitative Easing and Increasing Government Debt - As more and more money is printed, more investors and high net worth individuals will choose to obtain hard assets vs. cash in the bank. In a world of QE (quantitative easing) infinity, we will have more dollars chasing after the same scarce assets. As long as central banks' balance sheets continue to expand, Real Estate will gain purchasing power.
- Mortgage Originations by Credit Score - The risk profile of borrowers over the past ten years has never been better, meaning default risk is low.
Which Indicators Can We Watch to Know if A Potential Bottom in The Real Estate Market Is In?
I’ll be paying attention to the following four indicators:
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- A Decrease in Jobless Claims
- The Ten Year Us Treasury Yield Begins to Increase and Moves Above 1.25%
- St. Louis Financial Stress Index Starts to Decrease
- We See an Increase in Purchase Mortgage Applications
What Does This All Mean for You?
Homebuyers: Every homebuyer's situation is different, and now could be the most opportune time to buy for a specific individual. Interest rates are at record lows and the housing inventory is increasing. With many businesses closing their doors for good, the unfortunate truth is that many people will find themselves in a position where they need to relocate or find new housing. This will open up great opportunities for well-capitalized buyers.
Homeowners: It’s best to approach the sale of homes on a case-by-case basis. For some individuals, selling now could be your best option. With Interest rates at record lows and a push for Work From Home (WFH), we are seeing increased demand in Tahoe Real Estate. If you decide to wait to list your home, now could be a good time to refinance depending on your current interest rate.
If you have any questions about anything in this newsletter, would like to discuss your specific situation, or questions regarding real estate in the Tahoe area, please don’t hesitate to contact me. I am following the economic situation closely, and I will be updating you along the way.
Stay safe, and feel free to reach out to me with your thoughts!
