Housing-related stocks such as Zillow and Redfin fell by more than 10 percent on Wednesday, April 1. It appears these stocks may be responding to mortgage applications falling 24 percent, well beyond expectations, from a year ago due to increased concerns over the spread of the coronavirus. Many economists are predicting that COVID-19 will lead us into a recession. We’re already seeing some fallout in the lending capital markets.
3 Ways COVID-19 Is Impacting the Home Buying Process
In the week ending March 28, 6.6 million Americans filed for unemployment. Half that many filed the week before. Globally, more than 1 million cases of coronavirus have been charted with nearly a quarter of those in the U.S. Several states have issued shelter-in-place orders or lockdowns while others have ordered mandatory quarantines for incoming visitors, and some have issued curfew orders. These restrictions are causing havoc in the real estate market in very real ways.
Here are three ways COVID-19 has impacted the home buying process and will likely continue to impact the home buying process:
- Some states have shut down nonessential businesses, or businesses that are not “life sustaining.” As a result, real estate services such as appraisals and inspections can’t be scheduled in those states. Since homes can’t sell unless those services are performed, the effect is a slowdown in home sales.
- Social distancing is affecting all areas of real estate. Agents are reluctant to schedule open houses while mortgage brokers and title companies are moving services online, facilitating digital transactions rather than in-person meetings.
- One couple in Connecticut found themselves juggling dates and working through a difficult moving process as a result of government-mandated policies.
Other real estate sectors being impacted by the coronavirus crisis include property management, commercial real estate, and new development funding.
3 Real Estate Sectors Hit Hard by COVID-19
COVID-19 is pulling at the fabric of real estate in multiple ways. Here’s how it is impacting three real estate sectors that have enjoyed a long run of prosperity since the 2008 financial crisis.
In the property management sector, millions of unemployed tenants are unable to pay rent. While many have filed for unemployment insurance, it takes a few weeks to receive the first check. Treasury Secretary Steven Mnuchin said in a press conference on April 2 that the first stimulus checks will arrive in people’s bank accounts within two weeks. Still, many people have a rent payment due this week. Some tenants are asking for rent forgiveness during the crisis while some states, including New York, have placed a moratorium on evictions.
Property management firms are caught in the middle, balancing the concerns of both tenants and landlords. Of course, if they’re not collecting rents, they aren’t collecting management fees.
Commercial Real Estate
Retail shop closures are also having an impact in several ways.
- Malls, shopping centers, and other tenant-based complexes may not collect rents from their commercial customers during this time
- Force majeure clauses are allowing commercial developers to break commitments to completeprojects by a certain deadline
- New project developments are seeing delays as many construction crews are out of work due to stay-at-home orders and nonessential business closures
New construction is being impacted in residential, commercial, and industrial sectors. That means there are many developers and project managers out of work, along with their entire employment force including contractors and subcontractors. Of course, that’s having a domino effect on mortgages, rental agreements,
and maintenance sectors.
Even in states where stay-at-home orders and business closures have not been implemented, there has been a slowdown in development.
This, of course, is impacting how and where capital is being deployed in real estate.
How COVID-19 is Impacting the Real Estate Capital Markets
While the real estate market has been impacted at the ground level, the impact may be felt the hardest in the capital markets. Deal flow in private equity and real estate has fallen at an unprecedented global level. The Motley Fool recently reported the 10-year treasury hit an all-time low of 45 basis points after rising to an all-time high of 1.226%. This short-term volatility creates uncertainty, and investors don’t like uncertainty. The fallout is being experienced in the secondary market.
Mortgage bankers often sell loan originations to be packaged into mortgage-backed securities on the secondary market, then hold onto the loans. Recently, brokers have been issuing margin calls. As a result, lenders are seeing their liquid assets evaporate.
This creates a new problem for private lenders. Without working capital, they can’t issue new loans. That, in turn, could create a ripple effect throughout the real estate markets. Developers who can’t get loans can’t build. Rehabbers who can’t fund their projects will buy fewer properties, and they’ll sell fewer properties. Less capital in real estate means fewer real estate deals in all sectors–residential, commercial, and industrial.
Private real estate lenders facing a liquidity challenge amid current and sudden volatility need a capital infusion to continue operating and service the increased demand in loans caused by the rapid unemployment and business closures. That’s why Sharestates has issued a margin call relief program.
The Importance of Capital Liquidity in Real Estate Private Lending
Lenders without capital are like boats without water. The change in environment doesn’t change their nature, but it does affect their ability to function as intended.
While the CARES Act can assist families struggling with paying their mortgages, as well as businesses struggling due to closures, it does little to address the needs of private lenders who have seen their liquid assets drain as a result of margin calls.
The Federal Reserve, in mid-March, lowered its benchmark interest rate to 0%, but that’s done more to hurt the capital markets than help. If private lenders run for too long without liquid capital, it will seriously curtail their ability to issue new loans and maintain operations. The largest operational expense for most businesses, including private lenders, is payroll. Without working capital, private lenders will have to lay off some of their staff. Not only will that hamper their ability to service existing loans, but it will also add to the already skyrocketing unemployment rate. For small lenders, any reduction in employment staff could be drastic.
Additionally, lack of liquid operating assets could cause some lenders to miss mortgage or rent payments on their office space, which would seriously diminish their ability to continue operating.
The most likely scenario would be unnecessary consolidation in the lending market. As smaller lenders struggle to survive through the temporary turbulence, they may find their only option is to merge with a larger lender, sell their loans at a discount, or sell part or all of the business to larger lenders or investor pools for less than the company is actually worth. The best option for most of these lenders is to sell some of their existing loans at a discount so they can continue to underwrite new loans and navigate through the coronavirus crisis intact.
Liquidity is the backbone of private lending. Capital is to loan originations as water is to boats. For more information on Sharestates’ margin call relief program, click the button below.