Dear Friends,
I hope this note finds you well.
What a month… seriously, what a month. In my 26 years as a real estate broker (and 53 years as a human), there simply is no “comp” for what we are living through right now.
I have been wanting to get an update out as I know many of you are on pins and needles about where things are headed. What’s unique about this particular moment is that we aren’t dealing with one serious challenge… we’re dealing with two direct hits at the same time – one to our collective health and one to our entire economy.
Over the past several weeks, the government has had a choice – save lives or save the economy. For a long time, we tried to walk some imaginary tightrope between the two. That wasn’t going to work. Although I am not necessarily a huge fan of Governor Polis politically, I do think he has acted forcefully and decisively in putting lives first. Colorado’s response to the Coronavirus has made me proud, because we’re doing it better than many states around the country. But we are still going to feel pain, and I believe the hardest days are still in front of us.
I have said we have been processing a week’s worth of news every day during this crisis. And that’s true. Whatever bold conclusions you might come to on Tuesday are often rendered irrelevant by Friday, simply based on the firehose of information coming at us. And there’s lots more to come.
But because many of you have reached out me, and because I care about helping you get through this difficult season, I wanted to share some of my observations with you so you can think more strategically about the housing market (and your own finances) going forward.
HOMEOWNERS
If you are facing financial hardship, make your payments if you can. But realize a number of mortgage payment deferment programs may be coming soon. No one is going to get out of their financial obligations, but they may be restructured (such as skipping payments and then having those payments tacked on to the back end of your mortgage). Communicate with your lender or servicer early if you are having difficulty. They are being compensated to route you toward solutions. Here is a good resource for updates on mortgage servicing and government programs related to the Coronavirus pandemic: https://www.nar.realtor/political-advocacy/coronavirus-aid-relief-and-economic-security-act
THOSE LOOKING TO BUY
There is so much uncertainty in our current economic landscape that it’s very hard for me to endorse buying right now, unless you simply have to. Will this last three months, or 13 months? I have clients right now who live in Broomfield who are very eager to move to Littleton because of a new job. But my question is, does it make sense to sell your affordable home in Broomfield (when the buyer pool has shrunk by 50% or more), buy a larger home in Littleton (with a larger payment and mortgage) and then end up stuck there if your job goes away? I’d rather drive for a while than hope things just magically work out. We need more information to make informed decisions. Right now it’s all a guess. Defense, not offense, is my general recommendation until we know how long this will last.
THOSE LOOKING TO SELL
If you can wait, wait. Again, the buyer pool has shrunk by 50% and we are already dealing with enough stress related to the economy and our health. To add another highly stressful ingredient to your life – having strangers coming through your home in the age of Coronavirus – with only lowball offers and extremely shaky contracts to show for it… that’s hard to justify as being good for your mental health. The one thing about this current situation is I have to believe it’s only for a season. There is an end to this, sooner or later. In Wuhan, it took four months for the surge in virus cases to subside and now that economy is getting back to “normal” (for now). We’ll have to see if another wave of cases is coming later this year, but for now, that economy is surging back into overdrive and we’ll likely see dramatic improvement here once the first wave of cases has rolled through and we’ve adapted. Even if you are carrying a vacant home for a few months at $1,500 - $2,000 per month, that’s better than panic-selling into a $25,000 discount.
THOSE LOOKING TO REFINANCE
I’ve also had several people ask me about refinancing. This is a huge subject, because the mortgage markets have gone through unprecedented turmoil during the month of March. Rates have been all over the place, guidelines are changing by the hour, programs are disappearing overnight and some lenders are refusing to honor rate locks made during the first days of the crisis, when 30 year loans temporarily dove south of 3% as the 10-year T-bill fell to a floor-shattering low of 0.29% (it had been well over 1.00% at the start of the month). For context, there is a combined total of about $11 trillion in mortgages in the United States today. The system is built to handle about $1 trillion of new capacity each year. During the one wild week at the start of the month when the stock market first cratered and interest rates plunged through the floor, the system took on over $4 trillion in new mortgage commitments. Lenders were experiencing such overwhelming demand that they quickly responded by raising the “spread” between the 10-year T-Bill and 30-year mortgage rates from the normal 2-2.25% to nearly 4% to simply shut off the volume. That’s why rates when from 2.875% on a 30-year loan to north of 4.00% in about 48 hours, even though the stock market continued its nosedive. Credit markets froze up, unable to handle the financial commitments they had made… at which point the Fed stepped in and announced it would begin buying mortgages (printing money) to cover the huge chasm between commitments and available resources. It’s all unprecedented. With all of that as background, here’s what I think. When things calm down (two to six months out), we will come out of this bruised and battered economically (at least for a while), which means rates should eventually level off at a very low level. That’s probably the best time to refinance, assuming you still have a job. You may have missed “a window”, but you haven’t missed “the window” to refinance in 2020, in my opinion.
LANDLORDS
For landlords… I would encourage you to keep in mind that your tenants are going to remember how you treat them over the next few months for a long, long time. I have been in contact with many landlords over the past few weeks regarding this very fluid situation. Early on, I suggested all landlords reach out to their tenants to see how they are doing. But I also suggested they hold off on offering payment plans or reduced rent until we knew what was going to be in the stimulus bill. With $1,200 cash payments to most people making under $100k per year and (up to $3,000 for a household of four with two kids and two adults), there should be money for at least some of your rent payment, if not all of it. Evictions have been temporarily banned in many municipalities, so the wise move is to engage, empathize, and be human. Had these payments not been authorized by Congress, then immediately reducing rent or restructuring payments would have made sense. But now that we know cash is coming, landlords are on better footing. We all need to get through this together, landlords and tenants alike, so the more affirming and flexible you can be now, the better it will be for you in the long run.
THE REAL ESTATE INDUSTRY
Wow, so much change is coming here. I’ve said for a while that with 23,000 licensed agents in the metro Denver area, a huge die off was already coming. I had predicted half of those licensees would be out of this business in three years. Let’s revise that to “12 months”. A whole bunch of smaller brokerages are also going to struggle to make it through this. The number of agents and brokerages is set to collapse. And if you’re thinking the big, Wall Street backed disrupters are going to sweep in and pick up the slack… you might want to rethink that. While Zillow has won the “eyeball war” by providing a wealth of information to consumers, the fact remains they have never turned a profit in 14 years. Last week they pulled the plug on their Zillow “Instant Offers” program, which was financed by VC capital and was nowhere close to being profitable. Open Door has shut down its iBuying operations and Redfin Now was the first to tap out of the iBuyer market. When this is all said and done, the industry is going to look much, much different. Big brokerages and brands will survive and agents with money in the bank can hold their breath until things come back. Less well-capitalized entities will fail. I have no idea if Zillow, Open Door and Redfin can survive a financial collapse, at least under their current models. I don’t believe the housing market will ever function the way did just 30 days ago. Those who can pivot quickly, leverage technology and create value will pick up the market share for all those “orphaned” buyers and sellers who will no longer have cousins in the business.
GOVERNMENT AND TAX POLICY
This is not 2008 – it’s far more serious. The first stimulus bill passed in 2008 to deal with the onset of the Great Recession was for $165 billion. We eventually spent about $1 trillion in government stimulus to get through the Great Recession. The rest of the recovery was accomplished by dragging interest rates to zero and having the government print money and loan it to banks for free. This is a totally different moment, with an initial response 15 times greater than what we did in 2008. We may blow right past $30 trillion in federal debt by the time this is all over, which would be nearly $90,000 for every American. The stimulus bill passed in March is more than 10% of our country’s annual GDP. If you earn $100,000 per year, this one-time event would be like a $10,000 charge to your Visa bill. And oh yeah, with $23 trillion in debt, your Visa bill already had a $100,000 balance. This is crazy. There’s no way we can continue to exist without huge changes in tax policy.
So… while there is much that we don’t yet know, one bet I would be willing to make is… there are going to be significant changes to tax law as it relates to housing. 1031 exchanges could be in jeopardy. And I would not be surprised at all if there was a move to re-write the primary residence capital gains exemption (which currently requires you live in a primary residence two of the past five years to avoid capital gains taxes) to be extended to a minimum of five of the past eight years (as was proposed in the 2017 GOP tax bill). In the near future, I can’t see how the government won’t come looking for a larger share of all that housing equity homeowners accrued between 2008 – 2018.
OPPORTUNITIES IN THE FUTURE
Speaking bluntly, I think we’re going to be hard pressed to see further growth in housing prices, at least for a while. The market we are exiting was predicated on 3% unemployment and the DJIA between 25,000 – 30,000. Those days are gone, and so I to think a recalibration is coming. I do not think it will be as severe as 2008, because we’ve learned some lessons. Banks aren’t going to foreclose (at least not at the rate we saw back then) because they cannibalized their own portfolios by doing so. The only reason we had 26,000 homes for sale in the Denver MLS in 2008 was because more than half of those were foreclosures. We have 7,000 homes for sale today. We’ll probably have more this summer, but banks will be smarter about managing their own assets. They will choose to defer payments, modify payment plans or otherwise work to keep people in place. That should be somewhat stabilizing.
In the short run, having access to cash is most important. You need cash to feed your family, keep the lights on and pay your mortgage/rent. So for now, cash is king. But in the long run, the government’s only strategy for getting out of this is to print-print-print-print-and-print some more. That means in the long term, asset prices should go up while cash loses its value. So in the short term, cash is king. But in the long run, hard assets (including housing) will likely outperform parking your money in the bank and taking miniscule returns, or even negative returns if we follow Japan’s lead and venture into “negative interest rates” (deposit $10, get $9.50 back when you want your money). There will be an opportunity to buy on the other side of this… but again, until we know how long this is going to last, we can’t say when that buying opportunity will arrive. It could be in six months, or it could be 18 months out. But there will be an opportunity for investment once things settle down.
FINAL THOUGHTS, FOR NOW
Although I love talking to you, I sincerely wish that I did not have to devote my Saturday to writing a letter of this nature. March has been an exceptionally difficult month as I have been something of a “real estate triage nurse”, trying to hold deals together and managing my clients’ emotional swings while also trying to take care of my own family and help Victoria and Elizabeth reacclimate to living at home. Everyone is feeling a sense of loss, and there’s nothing easy about this strange season we are in.
But character is revealed in times of adversity. How you behave in crisis points to who you really are as a person. We have the opportunity to come out of this better and stronger as people and as a nation, but only if we choose to do so. Let’s lean into caring for our neighbors and listening to voices of hope.
There will be many more earthquakes in the days to come and we are far from being through this. But it will end, eventually.
I recently posted on Facebook how grateful I was to be introduced to the teachings of Jim Rohn 20 years ago. For those who don’t know, Jim Rohn was known as “America’s Foremost Business Philosopher” and taught life-changing classes and seminars throughout the 1980s, 1990s and early 2000s (he passed away in 2009 at 79 years of age). So much of who I am today was shaped by things I learned from books Jim Rohn authored and recorded seminars I’ve listened to again and again over the past two decades. One of his best teachings is what he called the “Ant Philosophy”. In short, ants have survived since the beginning of time because they have learned to “think winter all summer”. In other words, when the grass is green and the sun is out and life is good and many are lounging… ants are working. Preparing for the winter. Taking care of the colony. Doing the work while they are able. But then, when winter comes and they are trapped underground and it seems dark and cold and hopeless, ants have learned to “think summer all winter.” It’s as if they say to one another, “Don’t worry – it’s only for a season. We’ll be out of here soon enough. The sun will shine again and we’ll get outside. Surely it won’t be this way much longer.”
Right now, the Ant Philosophy applies to us. Yes, we may be headed into a season of winter and it may be difficult… but we will get to the other side of this. The sun will shine again, we’ll be free to go out and hike and play and gather and congregate and support and reconnect with one another… probably with more depth and integrity and honesty that we’ve ever exhibited before. Our character is being re-shaped right now. Although it’s not an easy process, I believe we are collectively going to be better and more authentic for having gone through it. Let’s cling to that hope.
Be well everyone.
I can’t wait to see you all again soon –
Dale Becker, CRS
RE/MAX Alliance
(303) 416-0087
