As the full effects of the Corona-virus are still being realized one thing is for sure, it has had fairly significant effects on residential home buying. Here in South Carolina where I sell all over the state, my team and I are seeing a slowdown, not because people aren’t interested in buying, just that everyone is sitting thinking “what do we do”? While home sales have dropped dramatically during the outbreak, house prices stayed about the same or suffered a slight decrease. It’s harder for prices to change when there are few transactions.
Home purchase agreements usually outline penalties for not meeting deadlines or for canceling the deal. Many real estate agreements now include clauses to shield buyers or sellers in case they have to delay or cancel because of coronavirus-related issues. These addendums may address such things as the unavailability of inspectors or appraisers, a buyer’s inability to travel to sign documents, or business or government closures, according to the National Association of Realtors.
Video only virtual home tours and virtual showings are becoming commonplace these days. Agents walking through a home while their buyers are on a video watching live has replaced the standard showing in person. When physical showings are allowed extra precaution is in order with gloves, masks, and no touching of surfaces.
Covid-19 is likely to hit commercial real estate much harder than residential in the long term, as people and companies get more and more used to and comfortable with remote, “from home” work. I believe many companies will see that it is possible to have a smaller staff that works in the office, and thus will either reduce the size of their office space and either cancel or non-renew their leases, or sell their commercial space. Utilizing apps like Zoom and Slack to facilitate team communication.
- 13% of CFOs have already cut real estate expenses with another 9% planning cuts in the months to come.
As far as home sales and residential real estate, that remains to be seen. In South Carolina, real estate agents/sales have been classified as an “essential” service so that means we real estate professionals and those in the field are allowed to continue to work. However, on a precautionary basis. What you’ll likely experience is longer than average closing and contract times. Courthouses, where title abstractors have to research, are only allowing so many people in and at certain portions of the day. Banks are working on a skeleton staff, and also remote as well so funding loans, sending wires for earnest money, etc are slower. Paralegals are working from home more, as are underwriters and other crucial careers necessary for a transaction.
VACATION RENTAL EFFECTS
As most of you know South Carolina is a huge tourist destination since we are one of the East Coast’s biggest coastal hot spots. Popular beach towns like Myrtle Beach, Pawley’s Island, Charleston, Sullivan’s Island, Kiawah Island, Folly Beach, Isle of Palms, and Hilton Head just to name a few are home to mostly second & investment homes.
The likely negative effect is that not as many tourists would be expected to come from up north (especially by plane) and rent smaller hotels, or condos in many of the resorts that dot the Carolina coastline.
From a luxury real estate perspective rental season is starting earlier now. Instead of Memorial Day, it’s April 1. Vacation rental agencies around have been getting calls about the large high-end rentals because visitors are looking for April and May leases with the option to extend them for the full summer through Labor Day. Whereas, most vacation tourists only come for a week or so. One agent notes: ‘there is just more room to breathe out here’ and families feel safer,” he said, adding that grocery stores have restocked amid shortages and restaurants are offering take out. “It’s not a bad environment to be quarantined.” Places like Isle of Palms where there are many large beach homes get well over $5000 a week. Although Kiawah Island would be a hard place to get delivery for food, the golf and tennis are worth it. Luckily if you’re a second or third homeowner on one of our many beaches of South Carolina just keep your pantry stocked and enjoy.
Mortgage Lending Environment
Covid-19 or Novel Corona Virus has pushed the Federal Housing Finance Agency (FHFA), [which regulates mortgage facilitators Fannie Mae and Freddie Mac], directed mortgage servicers of Fannie and Freddie mortgages to offer mortgage forbearance or reduced payments to homeowners impacted by the novel coronavirus. There is another directive from the FHFA put a moratorium on foreclosures and evictions of homeowners whose mortgages are owned by Fannie or Freddie.
So.. Although that looks nice and enticing to the everyday homeowner there could be much larger ramifications from the after-effects of this. What happens to the mortgage bondholders that rely on the payments? Servicers, banks and lenders will struggle to make their payments as well, and much of these banks are the ones that keep the financial ball rolling for everyone. Among those banks are the biggest in the country—Citi, JPMorgan Chase, Wells Fargo. If mortgage servicers go belly up, there is no one to collect mortgage payments and disburse the money to investors of mortgage bonds. The entire mortgage infrastructure would collapse and investors would be holding potentially worthless mortgage bonds (circa 2008 financial crisis). Banks servicing loans and/or holding mortgage bonds would be short on the cash that they typically lend to homeowners.
Mortgage lending could come to a halt. Pension funds could take yet another hit. It could make the economic recovery after the pandemic take even longer.
So far the idea floating around would be for Congress to approve credit to the mortgage servicers which would allow them to make their payments to mortgage-bond investors in the short term.
On the bright side mortgage rates are really low.
Back to the processes that get us to closing. That would be underwriting, appraisals, and verification of income and assets. Last week, Fannie Mae and Freddie Mac relaxed their standards for both property appraisals and verification of employment on the loans they buy. According to the FHFA, Fannie Mae and Freddie Mac will use “appraisal alternatives to reduce the need for appraisers to inspect the interior of a home for eligible mortgages.” The issue of appraisers needing to inspect homes as part of the mortgage process has been a mounting concern as the virus has continued to spread throughout the nation. GSEs (Fannie & Freddie) to begin using both drive-by appraisals and desktop appraisals in certain circumstances to ensure that the mortgage process is not held up due to appraisal issues for purchase mortgages only. Both the adjusted appraisal and employment verification standards are in effect through May 17, 2020
And late last week, the Federal Housing Administration and Department of Veterans Affairs made similar changes.
The Government loan agencies FHA and VA both announced late Friday that would allow for appraisal and income verification alternatives as appraising homes and verifying employment are more difficult right now than they were just a few weeks ago. VA appraisal process and are still required to meet Uniform Standards of Appraisal Practice and state requirements but are allowed the broader use of exterior inspection vs the standard requirement of interior views.
Income Verification Changes
Some lenders have set stricter criteria for mortgages during COVID-19, which means borrowers with lower credit scores and smaller down payments may find it harder to qualify.
The availability of mortgage credit dropped 16% in March to its lowest level since June 2015, according to an index calculated by the Mortgage Bankers Association. A drop in the index indicates that lenders are tightening their standards.
That doesn’t mean you can’t qualify for a mortgage amid the coronavirus outbreak, but you may have to shop a little harder according to Nerdwallet.
For mortgage approvals the FHFA & FHA states that “in the event, lenders cannot obtain a verbal verification of the borrower’s employment before loan closing, they will allow lenders to obtain verification via an e-mail from the employer, a recent year-to-date paystub from the borrower, or a bank statement showing a recent payroll deposit.”
And here, from Fannie Mae’s bulletin, is more detail on how each of those forms of verification of employment will work:
- Written VOE: The Selling Guide permits the lender to obtain a written VOE (verification of employment) confirming the borrower’s current employment status within the same timeframe as the verbal VOE requirements. An email directly from the employer’s work email address that identifies the name and title of the verifier and the borrower’s name and current employment status may be used in lieu of a verbal VOE. In addition, the lender may obtain the VOE after loan closing, up to the time of loan delivery (though we strongly encourage getting the verbal VOE before the note date).
- Paystub: The lender may obtain a year-to-date paystub from the pay period that immediately precedes the note date.
- Bank statements: The lender can provide bank statements (or other alternative documentation as permitted by Selling Guide B3-4.2-01) evidencing the payroll deposit from the pay period that immediately precedes the note date.
- Assets: the mortgagee must also provide documentation of a borrower’s cash reserves equaling a minimum of two months of principal, interest, taxes, and insurance as normal.
New Homes Construction Builders
Well, since nearly a third of all building products come from China it goes without saying there is going to be a problem. Subs and tradesmen can continue to work to frame, roof, install siding etc, but with a strain on materials, things could get dicey. These supply lines have been disrupted. Although home builder confidence was sky high before the Corona-virus epidemic started the materials supply chain problems will almost certainly exacerbate an already questionable outlook.