Real Estate and Coronavirus / Recession

[thegenius]

We just entered day one of escrow on a home purchase. I'm watching TV tonight and the madness with COVID-19 continues. Stocks continue to drop. Everything is being cancelled. One NBA player contracts it and they shut down the ENTIRE LEAGUE. No flying from Europe to USA. All mass gatherings are going to be on hold.

In short, I think our world is going to "hibernate" or just "pause" for the next few months, maybe 3-6 until we get a hold of this thing.

Question is whether this is a good time to buy real estate? Or is the real estate likely to fall too with the stock market? I'm getting a little nervous about this, wondering if our pending purchase is going to be a good one or should we wait to buy in the next 6-12 months when all of this blows over.

FWIW:
- we are buying in the Bay Area (Marin County)
- were quoted something like 2.875% on a 10/1 ARM, or 3.4-3.5% on 30-yr fixed.
- we're putting down 10% (with no PMI!!!)
- our home purchase is in the 33rd percentile of purchases as ranked by $/sq ft. That is, we are buying under the mean sq/ft price.
- I really like the house but I'm not in love with it.
- we plan on being there for at least 8-10 years...but by then the kids are gone and we might want to move to something smaller.

What do you think?

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[sliceofbread136]

I have zero expertise so take what I say with a grain of salt...

I think it’s hard to say. Rates are at historic lows, and if you take that fixed rate mortgage option you are getting a good deal. On the other house prices are really high right now, and I foresee a price drop soon as people start to lose their jobs (and default on their mortgages as they are over leveraged with no emergency fund). With a QE happy administration in office now (already pushing for a bail out rofl) I could see rates dropping even more...

personally if I was in your situation with a good emergency fund, a stable job, no other debt and a down payment ready I would just do it. When you have a good solid base why let the economy dictate how you live your life

 

[Stroganoff]

What's your current living situation like? Currently renting? Currently in a house you own?

 

[thegenius]

We are renting. Our landlords are selling their home and moving into this home on July 1. So they have given us about 6 months to find a place to move which is very nice of them.

So as far as I know, they are going through with the sale of their home and will move here, unless everything just shuts down over the near term where there are buyers nor sellers at all. The housing market just freezes.

The other news is our broker is going to lock us in at a 30 yr fixed at 3-3/8 @ par. That is really low!

 

[Birdstrike]

We just entered day one of escrow on a home purchase. I'm watching TV tonight and the madness with COVID-19 continues. Stocks continue to drop. Everything is being cancelled. One NBA player contracts it and they shut down the ENTIRE LEAGUE. No flying from Europe to USA. All mass gatherings are going to be on hold.

In short, I think our world is going to "hibernate" or just "pause" for the next few months, maybe 3-6 until we get a hold of this thing.

Question is whether this is a good time to buy real estate? Or is the real estate likely to fall too with the stock market? I'm getting a little nervous about this, wondering if our pending purchase is going to be a good one or should we wait to buy in the next 6-12 months when all of this blows over.

FWIW:
- we are buying in the Bay Area (Marin County)
- were quoted something like 2.875% on a 10/1 ARM, or 3.4-3.5% on 30-yr fixed.
- we're putting down 10% (with no PMI!!!)
- our home purchase is in the 33rd percentile of purchases as ranked by $/sq ft. That is, we are buying under the mean sq/ft price.
- I really like the house but I'm not in love with it.
- we plan on being there for at least 8-10 years...but by then the kids are gone and we might want to move to something smaller.

What do you think?

I say take the 3% 30 yr and buy. Or, see how low you can get on a 10 year. I went that route a year ago and am on track to have my house paid off in 9 more years, which will coincide with both of my kids being out of the house and me done paying for colleges. I wouldn't base your buying decision on a virus or the stock market. These too, shall pass.

 

[thegenius]

I say take the 3% 30 yr and buy. Or, see how low you can get on a 10 year. I went that route a year ago and am on track to have my house paid off in 9 more years, which will coincide with both of my kids being out of the house and me done paying for colleges. I wouldn't base your buying decision on a virus or the stock market. These too, shall pass.

I'm thinking about it.
We were locked in at 3.375 for 30 yr fixed. No points.

Our guy said mortgage applications + refi applications are at an all time high. BofA has 44,000 open applications. (Now that number to me means nothing, but he said it's an all time high). Apparently banks are at capacity and they can't give more, so they don't want to, or don't see the need of doing super low rates because they can't fill them. This is what he is saying....

You're paying off your loan in 10 years? That's sweet. I can't do that (it's a 1.3M home). But we can accelerate payments on it though perhaps.

 

[Hamhock]

I'm thinking about it.
We were locked in at 3.375 for 30 yr fixed. No points.

Our guy said mortgage applications + refi applications are at an all time high. BofA has 44,000 open applications. (Now that number to me means nothing, but he said it's an all time high). Apparently banks are at capacity and they can't give more, so they don't want to, or don't see the need of doing super low rates because they can't fill them. This is what he is saying....

You're paying off your loan in 10 years? That's sweet. I can't do that (it's a 1.3M home). But we can accelerate payments on it though perhaps.

Do you have the finances (and will you in 10 years) to keep that house as a rental when you downsize?

If so, the 30-year fixed at 3.375% is pretty difficult to pass up. House prices may drop significantly this year (and maybe you could wait and get a cheaper house you like more, but your deadline makes this a risk) but if you are thinking long term, then that doesn't really matter. You could pay the minimum every month (investing the difference) for 10 years and then have a rental that will more than pay for the mortgage+expenses (unless you are way over-paying now or you think Marin is going to be come less desirable [highly doubtful]) and all of the tax benefits that come with that.

If you will have the finances to covert the house to a rental in 10 years, it's a no brainer to me.

HH

 

[findoc]

Honestly, there's a lot we don't know. Will there be a recession? How deep will it be and how long will it last? How will it affect home prices? Specifically in your area? We can speculate but just don't know.

Here's my take. This virus is causing unprecedented interruption to our economy, and it might take some time to figure out lost revenues because of it. Statistically, a large drop in stock market precedes an economic recession. During economic recessions, the fed uses its tools to provide support, either by providing liquidity (as we've already seen in the short-term repo market this past week) or by pushing down interest rates. With respect to mortgage rates, I have a few thoughts. If (more like when) the fed lowers interest rates, mortgages rates will follow. At the same time, recessions lead to an increase in default rates, which will push mortgage rates higher. This is illustrated below:

Rm = Rf + Rprem

Rm = mortgage rate
Rf = baseline risk-free rate
Rprem = default risk premium

During a recession, the fed reserve will put downward pressure on Rf. At the same time, with the increase in default risk, the market will require a higher return and therefore increase Rprem. Whether Rm rises or falls depends on the relative change in Rf and Rprem.

With respect to home prices, obviously the virus and a potential recession would contribute to downward pressure on prices, but who knows how much.

Sorry this is a long-winded answer, but hopefully it puts things into perspective.

 

[findoc]

Well it looks like the Fed has already pushed rates to zero

Fed Cuts Rates to Near Zero and Will Relaunch Bond-Buying Program

The Federal Reserve lowered its benchmark interest rate to a range of 0% to 0.25% and said it would buy $700 billion in Treasury and mortgage-backed securities in an aggressive bid to prevent market disruptions from aggravating what is likely to be a severe slowdown from the coronavirus pandemic.

www.wsj.com

 

[Dr. Death]

Well it looks like the Fed has already pushed rates to zero

Fed Cuts Rates to Near Zero and Will Relaunch Bond-Buying Program

The Federal Reserve lowered its benchmark interest rate to a range of 0% to 0.25% and said it would buy $700 billion in Treasury and mortgage-backed securities in an aggressive bid to prevent market disruptions from aggravating what is likely to be a severe slowdown from the coronavirus pandemic.

www.wsj.com

Can you tell me what this means for us on a practical level? Explain it to me like I'm 5 lol

 

[Splenda88]

If the housing market goes down like it did during the great recession, a lot people will be a lot richer...

 

[findoc]

Can you tell me what this means for us on a practical level? Explain it to me like I'm 5 lol

This is how they do it:
Among other things, the fed can manipulate interest rates either by directing dictating the interbank lending rate (the rate at which banks lend to each other) or by "printing" money and using it to buy bonds in the open market (called quantitative easing), which creates excess demand for bonds and pushes up their prices and pushes down their yields.

This is why they do it:
Think of it this way. Economies naturally go through cycles, ups and downs, expansions and recessions. Theoretically, the fed will press the gas pedal during recessions and press the brake during expansions. Overall, the intention is to smooth economic growth. Whether they achieve this in practice is highly debated.

Lowering the interest rate is seen as the fed's gas pedal for economic growth. It lowers the rate at which companies and consumers can borrow and therefore spurs corporate investment and consumer borrowing. Also, because bond yields are lower, investors will all else equal look to stocks for potential return, pushing stocks higher.

Companies make investment decisions based on whether their investment returns exceed the cost of financing. For instance, it makes sense to pursue a project with a 10% return if the cost of financing is only 6%. When the fed lowers the interest rate, it consequently lowers the cost of financing, allowing more projects to exceed to required threshold. This means that projects that weren't seen as viable before are now viable.

At the same time, the fed doing something so drastic is seen as a negative signal for the economy in the short-term, which may lead investors to sell their stocks and go to safer Treasury bonds.

 

[findoc]

Can you tell me what this means for us on a practical level? Explain it to me like I'm 5 lol

For individuals, it will probably mean lower borrowing rates. That's about it.

 

[thegenius]

Do you have the finances (and will you in 10 years) to keep that house as a rental when you downsize?

If so, the 30-year fixed at 3.375% is pretty difficult to pass up. House prices may drop significantly this year (and maybe you could wait and get a cheaper house you like more, but your deadline makes this a risk) but if you are thinking long term, then that doesn't really matter. You could pay the minimum every month (investing the difference) for 10 years and then have a rental that will more than pay for the mortgage+expenses (unless you are way over-paying now or you think Marin is going to be come less desirable [highly doubtful]) and all of the tax benefits that come with that.

If you will have the finances to covert the house to a rental in 10 years, it's a no brainer to me.

HH

Hi it's really hard to predict what we are going to have in 10 years. 10 years would be the earliest we would move out. But maybe we would stay longer. I don't know. At my current earnings, the mortgage payment + interest + insurance + taxes ~= 20% of my gross take-home pay.

So who knows....maybe I'll get an inheritance and can pay it off. Maybe we will have to move. Maybe I get sick and have to move. Maybe my wife gets tired of the home. Maybe we love it and stay. Hard to tell.

If you will have the finances to covert the house to a rental in 10 years, it's a no brainer to me.

I tend to think so too.

- I'm a doctor and as long as I don't fook up I'll have a job and a high paying one.
- As long as the world doesn't come crashing down we are going to have a relatively terrible, wasteful health care system and I'll be able to make 400K/year. Sure it might go down a little.
- Marin County realestate is $500-$1000 / sq ft. People want to move here. It has been like that since California had sunshine and the Bay Area had water around it. It's even more so now with all the tech companies here.

 

[thegenius]

Well it looks like the Fed has already pushed rates to zero

Fed Cuts Rates to Near Zero and Will Relaunch Bond-Buying Program

The Federal Reserve lowered its benchmark interest rate to a range of 0% to 0.25% and said it would buy $700 billion in Treasury and mortgage-backed securities in an aggressive bid to prevent market disruptions from aggravating what is likely to be a severe slowdown from the coronavirus pandemic.

www.wsj.com

I saw this. It's basically free for banks to borrow money from the federal reserve.

However...I just called my mortgage broker at BofA and he said home mortgage lending rates won't go any lower because banks are at capacity now. They can't take more loans. They have a record number of refinance applications and they just can't handle anymore.

 

[Splenda88]

Hi it's really hard to predict what we are going to have in 10 years. 10 years would be the earliest we would move out. But maybe we would stay longer. I don't know. At my current earnings, the mortgage payment + interest + insurance + taxes ~= 20% of my gross take-home pay.

So who knows....maybe I'll get an inheritance and can pay it off. Maybe we will have to move. Maybe I get sick and have to move. Maybe my wife gets tired of the home. Maybe we love it and stay. Hard to tell.



I tend to think so too.

- I'm a doctor and as long as I don't fook up I'll have a job and a high paying one.
- As long as the world doesn't come crashing down we are going to have a relatively terrible, wasteful health care system and I'll be able to make 400K/year. Sure it might go down a little.
- Marin County realestate is $500-$1000 / sq ft. People want to move here. It has been like that since California had sunshine and the Bay Area had water around it. It's even more so now with all the tech companies here.

That is kind of a high mortgage payment... If your salary is ~300k/yr, that is 5k/month mortgage payment.

 

[thegenius]

That is kind of high mortgage... If your salary is ~300k/yr, that is 5k/month mortgage payment.

Yea I hear ya, I make 420-480K.
I bring home about 35K/month (maybe a little more)
and my house payment would be (principal + interest + house insurance + prop taxes) is like 6.5K.

Still high, but manageable. But I agree not ideal.
Plus for a variety of reasons my wife doesn't want to leave the area. :-(


Oh god how I wish I could live somewhere and by an awesome house for 800K, and pay it off in 10 years. That would be my financial dream.

 

[Splenda88]

Yea I hear ya, I make 420-480K.
I bring home about 35K/month (maybe a little more)
and my house payment would be (principal + interest + house insurance + prop taxes) is like 6.5K.

Still high, but manageable. But I agree not ideal.
Plus for a variety of reasons my wife doesn't want to leave the area. :-(


Oh god how I wish I could live somewhere and by an awesome house for 800K, and pay it off in 10 years. That would be my financial dream.

How come you bring so much home given that your salary put you in a high income tax bracket?

 

[Hamhock]

Hi it's really hard to predict what we are going to have in 10 years. ...

So who knows....maybe I'll get an inheritance and can pay it off.

Yes, there's always uncertainty -- but folks in our profession probably have the least uncertainty with decisions like this.

I am concerned you didn't understand my post because you mentioned a "dream" of paying the house off. That's not ideal at all from my standpoint.

With less than 4% mortgage rates and RE tax rules, you almost WANT to have a 30-year mortgage on a rental.

My question about "having the finances in 10 years" to make it a rental was basically asking if you would have another down payment and a year of mortgage payments saved up.

If so, you would then go buy another house on a 30-year fixed and let renters pay off the rest of your mortgage and give you nearly completely tax deductible income every month (which is huge when taxed in CA with your income).

If able, rinse and repeat.

HH

 

[thegenius]

Yes, there's always uncertainty -- but folks in our profession probably have the least uncertainty with decisions like this.

I am concerned you didn't understand my post because you mentioned a "dream" of paying the house off. That's not ideal at all from my standpoint.

With less than 4% mortgage rates and RE tax rules, you almost WANT to have a 30-year mortgage on a rental.

My question about "having the finances in 10 years" to make it a rental was basically asking if you would have another down payment and a year of mortgage payments saved up.

If so, you would then go buy another house on a 30-year fixed and let renters pay off the rest of your mortgage and give you nearly completely tax deductible income every month (which is huge when taxed in CA with your income).

If able, rinse and repeat.

HH

Yup I see what you are getting at. This will be our primary residence and maybe at some point turn into a rental. but we have no plans for that right now.

But in ten years we should easily have enough money to buy another place if needed.

(I hope...kids suck up so much money and time and they are going to college soon)

 

[thegenius]

How come you bring so much home given that your salary put you in a high income tax bracket?

I dunno?

Last year made I made more than I thought but I won't make that much this year. Made about 500K, taxable income was 393K. So over 100K in deductions (like SEP-IRA, HSA, health insurance premiums, business deductions, kid deductions, etc). Paid Fed 91K, CA 32K in taxes. In fact I made too much and it almost completely phased out my QBI deduction. I don't want to work as much this year and maybe I can have more of a QBI deduction, which will save me money. Save money by not working, now that is a novel concept!

 

[thegenius]

If so, you would then go buy another house on a 30-year fixed and let renters pay off the rest of your mortgage and give you nearly completely tax deductible income every month (which is huge when taxed in CA with your income).

Wait...what do you mean tax deductible income?

Let's say in 10 years we buy another home and rent this one. Let's say my monthly payment is this home is 6K. Say I will be able to get 7K/month for rent. So each month I make 1K. Is that tax deductible?

I'm missing something

 

[Hamhock]

Wait...what do you mean tax deductible income?

Let's say in 10 years we buy another home and rent this one. Let's say my monthly payment is this home is 6K. Say I will be able to get 7K/month for rent. So each month I make 1K. Is that tax deductible?

I'm missing something

The exact specifics can't be provided without knowing more details regarding your income and mortgage.

However, generally, when the property is a rental, the following are tax deductible: all property tax, all mortgage interest (doesn't matter the value of the home), all expenses, and the big one - depreciation (over 27.5 years).

Additionally, if these deductions exceed your income from the property, they are "rolled over" to the next year - and so on.

So, it is not hard to imagine scenarios that result in tax free income (or nearly tax-free).

Furthermore, this income can be used to help your debt to income ratio for future lending purposes (verifiable and consistent; but the deductions kinda hurt this benefit). And, as they pay your mortgage each year, your debt is decreasing. And the rents will increase over time and the "value" of the interest and debt will decrease due to inflation.

And here's the real kicker: many years from now, when you have a large amount of equity in the house (mostly from the renters paying off your mortgage), you can cash-out refinance hundreds of thousands of dollars that are all tax free!!

Also, at that time, your income from the property may be exceeding the deductions by more and more; but then you will not be working and will hopefully be in a lower income bracket (especially if some of your other retirement income is coming from long-term capital gains, which are taxed at a lower rate).

I'll defer the smart 1031 exchange for now -- but that's a yet another potential tax-escaping benefit.

Please note: I am not an accountant and I am not MD/JD. I am not giving financial or legal advice. Please verify what I am sharing, but this is what I have learned and what I am putting into practice with my first property as we speak.

Also, please note, AFAIK, these deductions are for income from your rental, NOT your primary income; unless you become a real estate professional as your primary occupation (then there's a bunch of other rules).

HH

 

[clubdeac]

bump.

Wanted to see if anyone had any further thoughts on whether to buy now or wait a few months to see if real estate prices drop. I'm looking at properties but wondering if I'll get a better deal waiting. My realtor of course tells me to buy now as the market will become flooded with buyers once the stay at home orders are lifted. Hmmmm, not sure what to think

 

[Splenda88]

I would wait for a few months... We are in uncharted territory right now.

 

[hundreddaysoff]

bump.

Wanted to see if anyone had any further thoughts on whether to buy now or wait a few months to see if real estate prices drop. I'm looking at properties but wondering if I'll get a better deal waiting. My realtor of course tells me to buy now as the market will become flooded with buyers once the stay at home orders are lifted. Hmmmm, not sure what to think

TL;DR No one knows if you'll get a better deal waiting.

Local and regional factors often trump national in real estate. I'm shopping for a long-term home for my family right now on the west coast and prices are stable but there are very few houses on the market. In markets with more supply, I imagine it is easier to buy.

Also depends whether you're buying to own or investing. If investing, in general I personally would wait a few months to see if there is a big increase in foreclosure sales and other properties with high potential returns. But it is really situational.

Bottom line, if you're buying a house to live there for decades, the price right now doesn't really matter as long as you can comfortably afford it, now and in the future.