”Home sales will decline this spring season because of unique economic and social consequences resulting from the coronavirus outbreak, but much of the activity looks to reappear later in the year.” NAR. Chief Economist Lawrence Yun
Many Shades of Difference
No doubt in a search for reassurance that this too will end, a lot of comparisons are being made between the economic devastation of the 2008 Great Recession and that now emerging from the COVID-19 pandemic. However, it seems, as Sesame Street’s Bob and Susan used to sing, “One of these things is not like the other.” That is both a good and a bad thing.
The two events, slightly more than a decade apart, differ in their cause, the landscape from which they emerged, the current and potential depth and breadth, and especially in the response and the potential resolution.
Obviously, a virus that emerged from a bat cave in China and a recession arising from a housing boom gone hay wire are different from the get-go and present vastly different challenges. As Americans we are old hands at rising unemployment, troubled businesses, and a plunging stock market-after all these events, singly or in combination, occur pretty regularly and are usually caused by excessive exuberance over something-stocks, housing, emerging industries. Once the bubble bursts the landing field is a familiar one. Virtually no one alive remembers the last time the nation was swept by widespread contagion. So, this time we have a cause that isn’t self-correcting and must be addressed before we can deal with any aftermath.
Housing, while not totally to blame for the Great Recession, certainly contributed more than its share. This time it is truly an innocent bystander. In fact, despite what are bound to be serious injuries, the industry’s evolution over the intervening 12 years may put it on the front lines of the recovery.
While it may have felt like a bursting bubble, the housing crisis and Great Recession actually tiptoed in; the boom had been slowing for quite some time. Home builders found themselves with mounting inventories as new home sales dropped from a peak of 1.3 million in 2005 to 750,000 in 2007. They responded by cutting housing starts by nearly 1 million over the next two years. Likewise, existing home sales had declined from 7.03 million at the end of 2005 to 4.98 million. By the end of 2007, unemployment was at 5.0%, up half a point in six months.
The boom was slowing, but the principal players were acting as though there was no tomorrow. Even with interest rates in the 6% range, homeowners were refinancing madly, not to save on their monthly payments but to extract the wealth created by rapidly escalating home prices. Over a quarter of every dollar refinanced from the 4th quarter of 2005 through the end of 2007 was cashed out of equity and pocketed by borrowers; a total of $640 billion.
Subprime lenders had pioneered a lot of mortgage “innovations;” low and no doc loans-incomes and assets verified on the borrower’s say-so-extremely high loan-to-value (LTV) ratios, flexible credit score requirements, and adjustable rate mortgages (ARMs) with teaser rates low enough to qualify that particular borrower but scheduled to quickly reset. Long before 2008 those chickens were coming home to roost.
By the end of 2006 adjustable rate mortgages and subprime loans were defaulting at rates of around 5%. Foreclosure filings jumped 75% from 2006 to 2007. When home prices started to fall, those homes that had become piggybanks went quickly under water. All of this happened before most even imagined we stood on the brink of a massive recession. Then housing led everything over the edge.
The Dike Burst
By the time the bottom fell out in mid- 2008, there weren’t a lot of resources left to plug the dike. With homes leveraged to the hilt, homeowners could not refinance when their rates adjusted or easily exit homeownership when they were laid off. Homebuyers disappeared, driving home prices lower, throwing more homeowners underwater. The stock market plunged, wiping out both wealth and retirement hopes. Banks failed by the hundreds taking out significant sources of mortgage lending for those who could still qualify to purchase or refinance, and credit tightened, cutting into those numbers.
At the height of the housing crisis, delinquency rates for subprime mortgages exceeded 35% and were running over 5% for those considered prime. In August 2010, the month before a scandal regarding the handling of foreclosures forced a moratorium, RealtyTrac reported that one in every 381 homeowners nationally received some type of foreclosure filing and 95,364 homes were actually foreclosed. About a quarter of all home sales were foreclosures, short-sales or sold out of lender-owned inventories (REO).
We Were Rolling Along …
In contrast, the onset of the current crisis was stunning. In January and February all the measures of a healthy economy were there, many at historic levels. Unemployment was at a 50-year low (3.5%) and the Dow was setting nearly daily records. Housing in particular was flying high.
After a long, slow slog builders were finally ramping up to meet demand. Housing starts were at an annual rate of 1.6 million units and new home sales hit a 13 year high of 800,000 units, leaving inventories still tight enough to encourage further building. Existing home sales increased annually for the 8th straight month, reaching 5.77 million and prices and thus levels of home equity were rising at a healthy pace.
Homeowners are far less leveraged than they were 12 years earlier. CoreLogic estimated the average homeowner with a mortgage was cushioned by $177,000 of equity in Q4 2019. While this is a worse case outlook, homeowners who found themselves in financial distress should have at least the possibility of selling their home as an exit strategy.
Another important difference between then and now-interest rates are at historic lows, giving homeowners additional resources for cashing out.
The market, as it again faces likely borrower distress, is on much firmer ground. The national delinquency rate is just over 3% and the rate in Freddie Mac’s own portfolio is below 1%. Foreclosure starts are at historic lows and the share of existing home sales made from REO or short sales has been around 2% for a year.
TRAFFIC NEEDN’T BE A DEAL KILLER
Being on a busy street shouldn’t mean a home doesn’t sell. There are more eyes to see the For-Sale sign and it may mean an easier commute for some buyers, and more stores and services nearby.
Many disadvantages can be mitigated. Shrubs or trees along the property line provide a visual screen, and mute noise. Ditto a solid fence which also keeps pets and children safe. Water features help drown out traffic noise. Heavier window treatments inside will muffle sound and newer windows can make a house virtually soundproof.
If all else fails, check the zoning. If the house can be sold for commercial use, it might bring in a higher price. REALTOR Magazine
The events of 2008 caught lenders and servicers flat-footed. They pursued their usual collection practices well into the crisis, and any coordinated response from state and federal governments or from private lenders was slow to arrive and admittedly poorly run. The first effort from the private sector in July 2007, HOPE Now, was intended to help subprime borrowers connect with credit counselors and servicers. It was roundly criticized as being run by the very people who caused the problem in the first place.
It was two years before the Federal Housing Finance Agency and Department of Treasury got a federal program off the ground. The Making Home Affordable program utilized servicers to operate an alphabet soup of programs to modify first mortgages, junior liens, accept deeds in lieu of foreclosure and other types of assistance. The program was notorious for losing documents, shuffling borrowers from one loan officer to another, foreclosing on borrowers while they were negotiating modifications, and other missteps.
Servicers did finally ramp up their staffs and trained them to better manage loss mitigation operations. However, years of declining delinquencies have allowed servicers to dismantle those “high touch”
IT’S ALL ABOUT THE LAUNDRY
Did the laundry room hire a press agent? An article in Builder magazine describes that part of the house as “the last great, unexplored territory for homebuilders” and claims it has “the power to differentiate, dazzle, and delight” homebuyers with only a little thoughtful effort. If builders pay attention to Whirlpool executive Michael Ledford, buyers may soon be offered a laundry with more room to hang and fold clothes and organize laundry baskets. There will be storage space for soap, dryer sheets, and bleach and Wi-Fi access. Yes, ‘Wi-Fi. New laundry machines offer many benefits, including allowing users to monitor loads remotely.
Consider Return on
On-line sites as well as experts like xx the National Associations of Realtors and of Home Builders provide a lot of info on the at-sale return for many projects. We looked behind the 56% average payback from the 2020 Remodeling Magazine survey to see the ROI they estimate for individual projects.
They note that the ROI on some of the highest end remodels have been sliding in recent years and that the payback was much higher for replacement of things like garage doors or windows. In fact, seven of the top 13 projects were exterior and few of them could be considered glamorous. Number one was adding manufactured stone veneer to the outside of a house with a 95.6% return; number five at 77.6% was fiber-cement siding replacement. Doing a minor kitchen upgrade (77.6%) outranked both a wood deck addition (72.1%) and a major kitchen remodel at 58.6%. A modest bath project brought a 10-percentage point higher return than adding a new one with an ROI of 64%.
There is a lot of variation on the return estimates across the sources. We found one that estimated 85% returns or better on almost every type of project, many that were close to the Remodeling Magazine estimates. There are a lot of caveats, but the biggest is avoid the assumption that any of the money spent on a project will turn out to be an investment. Again, you can’t let love, money, or necessity alone drive a decision. A project should be evaluated holistically; acknowledging the many factors and variations that go into both the cost of an improvement and the ROI.
Will you really be adding value? A homeowner’s “architectural treasure” of an addition could lead to prospective buyers’ universal “what were they thinking” reaction. Some improvement’s may be viewed as attractive nuisances by buyers and appraisers (sometimes pools fall into this category) and over-the-top decorating can drag down value. (Such a clever idea, embedding your wedding photos in the master bath countertop. Are you planning to sell soon?)
The rise of the internet and smartphones has empowered Millennials to research their financial decisions— large or small. Whether hunting for a good meal on Yelp, searching for their area’s best moving company, or doing a video walk-through of their dream home, Millennial movers are researchers by nature. They have more information at their fingertips than any generation before them, enabling them to alter the housing market in favor of well-equipped and informed home hunters.
When it comes to home hunting, 99% of Millennials go online to find their dream homes. They leverage technology by researching neighborhoods, school systems, and homes online, while setting up digital walkthroughs. Millennial housing trends revolve around this generation’s tech-savvy approach to the home search. Dawn Macri, Updater
Look at the Whole Picture
Might your project overbalance the house? Or the neighborhood?
Putting an expansive outdoor kitchen into the backyard of a home with only one bathroom is unlikely to bring a high payback. It is rarely a good idea to have the most expensive home on the block even if the kitchen is to die for. If the experts say your $150K renovation could bring a payback of 80%, ask yourself if your $525,000 home on its existing lot and that specific street will realistically sell for $645,000 when the project is done.
Consider Using Your Equity
Remember, those on-line project costs and payback numbers are averages. They include the well-planned jobs that truly brought value, sale price outliers, and those projects where the homeowner over-improved, overdid, and overspent. If your dreams are driving your project costs higher than your budget, check with your loan officer about an equity loan or a cash-out refi.
Also, if you are thinking about selling within a few years, consider running your home improvement plans past your real estate agent. He or she might advise you which improvement is absolutely necessary for a quick and profitable sale or suggest other improvements that make more sense.