Buying, Selling and Refinancing a Home in the COVID-19 Era
The COVID-19 pandemic has forced us to change the way we do many things in our daily lives. Mundane tasks such as shopping for groceries, getting a haircut or seeing a dentist have become stressful or logistically challenging. Since many simple acts are now complicated, what about big, complex matters like buying or selling a home? In this article, we describe how the residential real estate industry in the U.S. has adapted to the COVID-19 world, along with information to help you decide if the time is right for you to buy, sell or refinance your home.
First, a few numbers. Sales of existing homes (representing the vast majority of home sales in a given month) reached a pre-COVID, 10-year high in February 2020. Then, the roof caved in. When stay-at-home orders were first issued, home sales essentially froze, except for transactions that were already in process. By May 2020, existing home sales had fallen to about two-thirds of pre-pandemic levels. While that’s a big decline, it does show that transactions continue to close. Realtors have figured out how to complete transactions with minimal human contact, using Zoom meetings and virtual online home tours. Also worth noting, the supply of homes on the market declined by 27% in June 2020 compared to June 2019, as many would-be sellers have decided to hold off listing their homes. That lack of supply has caused home prices at the national level to rise by almost 5%.
Of course, there can be a great deal of anxiety involved in buying and selling what is probably our most valuable asset under these conditions. There is a great deal of uncertainty in our lives right now, and that creates an environment where rumors and worries thrive. To bring some clarity to the situation, we address questions and concerns people may have about buying, selling or refinancing a home today.
Isn’t the Economic Downturn Bad for the Real Estate Market?
While we are in a pandemic-induced economic downturn and unemployment has risen dramatically, this is not 2008 all over again. The housing market is much stronger now, as ever since the housing market crisis, lenders have insisted that homebuyers make a substantial (usually 20%) down payment. As a result, far fewer mortgages are “underwater” compared to 2008. Furthermore, employment among professionals has held up well, which was not the case in ’08.
As noted above, home prices nationally have increased, as the decline in buying activity has been more than offset by a shortage of homes on the market. According to industry experts Realtor.com, real estate activity is accelerating. For the week ending August 8th, their Housing Market Recovery Index reached 105.6 nationwide, the highest level since the start of the pandemic and 5.6 points above the pre-COVID benchmark level of 100. Of course, this will vary from one place to another, so find out how many days homes are typically on the market before they sell in the area you are targeting. In Colorado, for example, conditions are strengthening and more homes are coming onto the market.
Buy a Home Remotely? Really?
Yes, many people are buying homes without actually seeing them in real life. In fact, prospective buyers may not be allowed to tour an occupied home in your state. That’s not necessarily a bad thing. As a seller, having a virtual “open house” means you don’t have strangers walking through your kitchen, and as a buyer, you do not have to worry about being exposed to COVID by walking around someone else’s home. In addition to taking a virtual tour, potential buyers can request photos that show rooms from different angles and ask for floor plans with measurements.
A kind of “COVID contract” is being used in some states, allowing buyers to walk away if they successfully bid on a house without seeing it in person, but discover during the pre-closing inspection that they don’t like the home. As for the paperwork, many title companies are offering drive-through signings, and online notarizations can save time and reduce stress for both buyers and sellers.
Buyers Might Not Realize…
If your area does allow in-person home tours, buyers won’t be allowed to touch cabinet doors (homeowners may leave a few cabinets and closets open to provide examples). Also keep in mind that many homes have security cameras in various rooms, so sellers are capable of recording what potential buyers are saying – while that may be a violation of privacy, it's a warning to not say anything that could damage your negotiating position with a seller.
As a buyer, it’s always a good idea to get preapproved for a mortgage so you know what you can afford, but some banks may be skittish about pre approvals in this environment. Be prepared to fully document your income and savings, and work with a mortgage broker who can steer you toward lenders that are processing loan applications in a timely fashion so that when you’re ready to make an offer, you can show the seller that you have financing in place. If you’re looking to buy a second home, know that as working from home became a requirement, a number of people decided to ride out the pandemic someplace other than where they usually live, often an area associated with vacationing. Some have grown attached to their temporary locale and have decided to buy a second home there. So, buyers of second homes could face competition in some areas.
Sellers Might Not Realize…
Buyers shopping for homes in this environment are likely to be financially secure and able to make strong offers. That’s good news for sellers. Still, if you are planning to move you may wonder if you should keep current and rent it out to generate some income. Some owners are reluctant to sell while the pandemic is still raging, thinking the housing market may come roaring back when a vaccine or reliable treatments are found. While the idea may sound appealing, it may not be feasible, especially if you would have to charge a large monthly rental payment to cover the mortgage on your current home. In some markets, renters have been asking landlords (for whom some income is better than none) for concessions on the rent. While the market is firming in some areas, there are fewer renters looking to move in, especially for higher-end homes.
Mortgage Rates Are Dropping
Mortgage rates are now at all-time lows, with the 30-year rate for conforming loans at around 3% in mid-August 2020. Although rates on jumbo loans have not fallen as much, they are still at very attractive levels. Even if you are not looking to buy a home, it could be a smart move to refinance your current mortgage – assuming you have at least 25% equity in your current home or could reach that level with other funds. Note that as of September 1, 2020, the rate to refinance an existing mortgage will be roughly 0.25% to 0.50% higher than the rate for buying a home, due to fees put in place by Fannie Mae and Freddie Mac (the giants who buy mortgages from banks and other lenders) to encourage home-buying and cool off the refinancing boom. The move has drawn criticism from a number of sources, so stay tuned.
If you want to refinance, the best, fastest and easiest way could be to simply ask your current lender to lower your mortgage rate. Really. After researching current mortgage rates in your area, contact your lender. One of our clients recently did so and the lender lowered her mortgage rate by a full 1%. The only out of pocket cost for the homeowner was an $800 appraisal fee. Avoid taking on any other debt, as that will negatively affect your credit score.
Know that cash-out refinancings are more difficult now due to COVID-related uncertainties – in fact, two of the country’s biggest lenders pulled back from the cash-out refinancing business entirely – but others are still active. Here again, a good mortgage broker can be your best resource. Also, credit unions often offer favorable terms to their members for many types of mortgages. A final note – we advise clients to get a Home Equity Line of Credit (HELOC) as a source of liquidity, just in case you need it. It’s not a loan (that would be a Home Equity Loan, not a HELOC) – it is a credit line backed by the equity in your home, and you only draw on it if you need to. Your Gold Medal Waters financial advisor can help you to put this in place. Please reach out with any questions.