The impacts of the novel coronavirus disease (COVID-19) are touching every segment of our lives, and the real estate profession is no exception.

As the situation evolves constantly, first tuesday is providing this update on how the virus is changing real estate in California. Just this week, in an effort to avert a major crash, the Federal Reserve (the Fed) dropped their benchmark interest rate to 0%. Mortgage interest rates have decreased, but still have room to go lower when compared to how low other key interest rates have fallen.

Anxiety is sure to pull back sales volume, home prices and residential construction. But until these reports start to come in for the spring — in one-to-two months — we won’t know how significant the drop will be.

In the meantime, people are being told to stay home and Governor Newsom is pondering how the state will maintain a quarantine when there are so many people who are homeless or at risk of eviction. For now, the DRE is continuing to administer most state licensing exams, which are conducted in-person.

Read on for more details.

Our updated housing market forecast

Anxiety about the state of the economy has caused homebuyers to pause. With job insecurity at the forefront of many homebuyer’s minds, taking a leap into a new mortgage payment seems riskier than ever this spring.

Normally, an event like the coronavirus outbreak would cause home sales volume to slow dramatically — which has already begun — and home prices to follow quickly behind. However, with the 10-year Treasury (T-) Note hitting historic lows and recent news that the Fed has dropped their key benchmark rate to zero, the impact on mortgage interest rates will be significant. The average 30-year FRM rate was 3.36% in the week before the Fed dropped the federal funds rate to zero. During the same week, the difference between the 30-year FRM rate and the applicable benchmark rate – then 10-year T-Note – was nearly 2.5 percentage points, a full point above the average spread of 1.5 percentage points.

These figures show that while average FRM rates are at historic lows, they can, in fact, go lower. With significantly lower interest rates, homebuyers may well be enticed out of their cautious rigor mortis. Moreover, they will suddenly find their buyer purchasing power inflated, allowing them to qualify for higher prices, which will undoubtedly buoy home prices.

But will FRM rates go lower? Or will mortgage lenders, wary of the economic risks of an economic downturn, maintain their elevated spread in 2020?

It will depend on how long this pandemic lasts, and the degree of economic impact it continues to have on financial and mortgage markets. With the Fed now at a zero interest rate and with a $700 billion quantitative easing (QE) effort underway, they have thrown down arguably their most useful tool to pull the economy out of a recession – and we aren’t even in one yet!

Interest rate limbo

The Fed’s only option going forward will be to go negative, a dramatic action that they avoided during the 2008 recession and elongated recovery. If the Fed does go negative, expect to see the 30-year FRM rate fall below 3% for the first time in history. This downward rate pressure will be increased as the Fed will buy up mortgages as part of their QE efforts, and thus set the rates for the majority of mortgages going forward.

With significantly cheaper lending, home prices will receive a massive stimulus and builders with any sort of resources will be induced to build, uncertainty about the pandemic aside. Thus, like during the early 2000s when the Fed was in reaction mode to the unexpected events of September 11, a recession will largely be averted, and home prices will not receive a correction, but continue to rise beyond the pace of incomes.

But, like our economy this spring, this is all up in the air. In the coming weeks, watch mortgage rates closely for an indication of where home sales are headed through the remainder of 2020.

Cancelled: all real estate events, that is

With Governor Newsom calling to limit large gatherings to reduce the spread of the virus, the cancellations are rolling in. In the first week of March, the Mortgage Bankers Association (MBA) cancelled their big technology conference in Los Angeles. This was quickly followed by the cancellation of two major Southern California events by the National Association of Realtors.

Other, smaller gatherings have been cancelled, as well. Despite not meeting the 250-person threshold when events are required to be cancelled, in-person events like real estate training courses are being postponed or cancelled every day. Agents are nervous about gathering, especially those who are part of vulnerable populations.

On the client side, sellers are more hesitant to open their homes to potential buyers and many are cancelling open houses. Agents are reporting deals falling through as economic uncertainty sets in. Homebuyers and sellers unsure about job security are more likely to hunker down until the uncertainty passes, and real estate professionals are seeing that first-hand.

Most DRE exams to continue, for now

With much of the state now ordered to shelter in place, it’s likely only be a matter of time before the California Department of Real Estate (DRE) will start cancelling state licensing exams, which need to be taken in-person.

first tuesday reached out to the DRE for comment on this issue, and the DRE’s plan is to keep in-person exam sites open, unless they are located in areas with strict guidelines to limit gatherings. For example, all state exams scheduled between now and April 17th in Oakland have been cancelled due to the local health department’s requirements to shelter in place.

For testing sites that continue to remain open, the DRE is taking extra precautions to protect the health of examinees and proctors. This includes allowing examinees to test wearing protective gloves and masks, though these will be inspected prior to entering. Proctors are also disinfecting surfaces after each exam administered.

The DRE currently has no plans to move state exams online. Any exams cancelled due to coronavirus in the coming weeks will be rescheduled at a later date.

UPDATE: On March 17, the DRE announced it is cancelling salesperson and broker licensing exams in all exam centers from March 18, 2020 to April 7, 2020. Examinees affected by these cancellations will be notified by email and may reschedule their canceled exam dates using DRE’s eLicensing system. Exam rescheduling fees will be waived. Examinees with questions or concerns regarding canceled exams can contact the Department’s Licensing program at (877) 373-4542.

A temporary halt to evictions

Governor Newsom has announced he is granting authority to local governments to temporarily halt residential evictions. Individual cities like Los Angeles and San Francisco are also considering their own measures to keep people off the streets during this outbreak.

The authority given to local governments is in effect through May 31, 2020, and temporarily:

  • halts renter evictions;
  • halts homeowner evictions;
  • slows the foreclosure process; and
  • protects against utility shut-offs.

Halting evictions may be even more important in these coming weeks, as workers see their paychecks shrink or even disappear. Businesses are closing and retail, restaurant and service workers will see their hours reduced or will be laid off. Unless they have a large rainy-day fund — and most do not, as saving is difficult when tenants regularly spend half of their income on housing costs — they won’t be able to pay rent.

Now, more than ever, it’s important to keep everyone housed to contain the epidemic, and the government is seeing the need to step in.

Stay tuned in the coming weeks for more updates as emergency measures are passed by California and individual cities.

Related article:

How the coronavirus is impacting California’s housing market