Following the meteoric impact of the pandemic on the U.S. economy, National Association of Realtors chief economist Lawrence Yun sees the return of strong housing activity in the coming months as the nation reopens.
However, Yun warns that a second wave of the coronavirus could stall the recovery and advises following all Centers for Disease Control and Prevention guidelines to limit the spread of COVID-19.
Yun shared his predictions during his Economic and Commercial Real Estate Market Outlook seminar, held July 16 via Zoom for members of Greater Chattanooga Realtors.
“The market is coming back,” Yun explained. “In many markets, the activity is higher now versus one year ago, which is surprising, since we’re in the midst of a pandemic.”
The increased year-over-year activity could soon include Chattanooga, Yun says, despite a drop in closings in the city in March, April and May. The economist pointed to a jump in mortgage applications in Chattanooga in May, which he adds should result in more closings in August and beyond.
“Prior to the pandemic, mortgage application activity in Chattanooga was about 10% higher than at the same time in 2019. During the pandemic, this activity collapsed 33%,” Yun explained. “But now it’s about 15% higher compared to one year ago.
“Mortgage application activity turns into pending contracts, which turn into closings. So we missed the spring buying season, but all that activity might show up in late August, September and October.”
Yun credited historically low mortgage rates for boosting buyer interest during the pandemic. On July 16, the average rate for a 30-year fixed rate was 3.1%, the economist said.
Yun praised the Federal Reserve, which he said is making the low-slung mortgage rates possible. “The Federal Reserve is all in, meaning there is maximum liquidity to bring down interest rates,” he clarified.
Liquidity is the amount of money available for investment and spending.
Although mortgage rates are lower than ever, Yun said they could drop even more, as ten-year Treasury yields currently stand at 1%.
Fixed mortgage rates and Treasury yields tend to move together because investors compare the returns they can receive on government and mortgage-backed securities.
Despite foreshadowing the possibility of even lower mortgage rates, Yun does not recommend Realtors advise clients to wait to purchase a home.
“Lower rates are a good possibility but not a guarantee because things can change, so if you have a client who likes today’s rates, lock them in,” he said. “But if someone wants to wait a couple of weeks, don’t panic. Rates might be even lower.”
The fly in the ointment could be the small number of low- and medium-priced houses available for sale, Yun notes. “Buyers want to take advantage of the record low mortgage rates. Unfortunately, we don’t have sufficient inventory to satisfy the demand.’’
The inventory shortage stems back to the end of the subprime lending days, Yun explained. The economist said homebuilders overbuilt before the collapse of the subprime mortgage industry in 2007, but have since been underproducing. The cumulative effect of years of building fewer houses has resulted in the shortage.
The pandemic has only tightened the inventory, Yun said.
“Prior to pandemic, the message I received from Realtors was they could do more business if we had more inventory. But we now have even fewer listings and are therefore facing an ever-greater shortage of inventory.”
Moreover, Yun does not expect the inventory dilemma to dissipate any time soon.
“I thought we would have some relief this year, but because of the pandemic, builders cut back on production even more, which means the inventory shortage will be with us for the rest of 2020.”
While a housing shortage is bad news for buyers, it’s excellent news for sellers, who are often attracting multiple offers.
“Sellers have an advantage over buyers, so if you’re working with a buyer, there could be a lot of competition with other buyers,” Yun said.
“If you’re working with a seller, price their home correctly, because if you price it too high and it stays in the inventory for two or three weeks, people will think it’s a stale product.”
Yun’s concern for the economy extends beyond the housing shortage to the possibility of inflation occurring in the coming years.
Although personal income in the U.S. grew 12% in April and 7% in May due to the federal government’s stimulus package and enhanced unemployment insurance, the injection of cash into the economy came with a price tag – namely, a massive federal deficit, Yun said.
“The stimulus package is not a free lunch.”
Yun said the money for the stimulus package is coming from the Federal Reserve, which is simply printing the money.
“The unemployment checks people have been receiving are essentially printed money,” he explained. “When you print a lot of money, inflation could follow. In the 1970s, we printed a lot of money to fund the Vietnam War, and we had high inflation.”
That said, Yun does not expect inflation to flare up in the near future, but rather several years down the road due to the credibility of the U.S. dollar.
“I don’t expect inflation this year or even next year, but five years from now, we could see 5% inflation,” he acknowledged. “Social Security checks will rise by 5%, but the standard of living will not, as food prices will be higher, college tuition will be higher and everything else will be higher – including real estate prices.”
Yun encouraged Realtors to pass on this information to clients, as he says he believes property owners will be protected again inflation.
“Real estate is a very good hedge against inflation, as mortgage payments will not rise for those who buy a home this year or next year,” he noted. “Because once you lock in a low mortgage rate, your monthly payment is fixed for the life of the loan.
“This is perhaps a rare golden opportunity for people who are buying a home today. Real estate prices will rise, so your equity will rise, but not your monthly payment.”
Assuming the U.S. is able to curtail the worsening pandemic or someone discovers a coronavirus vaccine, Yun predicts the economy will rebound nicely in 2021, with gross domestic product, job creation, home prices and home sales all increasing.
“Whatever we’re missing in 2020, we can easily make up in 2021,” he said.
However, Yun says he does not believe the end of COVID-19 will bring about a complete return of pre-pandemic activity. Rather, he says the virus has served as a catalyst to bring about several permanent changes.
Yun notes the rise in remote working – prompted by the pandemic and facilitated by teleconferencing applications such as Zoom – could make the office market “more difficult.”
“Many people are finding that working from home can be just as effective as working from office,” the economist said. “Twitter has told its employees, ‘You can work from home forever,’ and Facebook is allowing its employees greater flexibility.
“Many other companies will offer greater flexibility, so rather than going to office five days a week, maybe people will go two days a week.”
While Yun says this paradigm shift will challenge the commercial real estate market, he expects it to lead to a boom in affordable housing markets such as Chattanooga.
“If someone who’s working in Atlanta doesn’t like the traffic, and they don’t have to go to the office every day, why not live in Chattanooga?” Yun asked.
Yun says other good things are happening, including job gains and fewer applications for unemployment insurance. He also expects to see a lot of spending unleashed as the economy continues to reopen and people dip into the money they saved while businesses were closed during the pandemic.
“We just need to practice social distancing. Health experts say masks will limit the spread of the virus, so don’t go to a party where you are rubbing elbows to elbows, and when you hold an open house, keep it safe, with only a few people involved.”
To view the video of Yun’s seminar, go to www.gcar.net/events/event/economic-update-w-dr.-lawrence-yun.