The Impact of Covid in a Shifting Market with Higher Interest Rates

The Impact of Covid in a Shifting Market with Higher Interest Rates

The Covid-19 Pandemic had far-reaching consequences for every aspect of every industry and real estate was no exception. Many major cities with a large real estate market saw large shifts in the trends of the past decade amid consumers rapidly changing priorities.

What have been thought of prior to Covid as “vacation” property markets found themselves booming, as buyers sought out space, comfort and access to nature, and prioritized wellness and family. Let's take a look at some of the more positive changes this major cultural event has caused.

Covid has Caused a Fundamental Shift in Priorities

Covid has had impacts both positive & negative on the real estate industry. While the world feels the effects of detrimental changes, there have been upsides to the pandemic as well. The demand for luxury properties has grown exponentially in what has been called “the great real estate shuffle” of Covid-19.

Everyone wants more out of a home and more out of living. Working remotely has given people a new level of freedom to live and work wherever they like and many have taken full advantage of this opportunity. Some people have wanted to downsize so that they have more liquidity and cash on hand while others have wanted to upsize with the need to stay inside more and have more amenities in their homes.

New Lending Regulations Put Today’s Borrowers on Far Firmer Footing

A far cry from 2007, when many borrowers had mortgages that were exploding—meaning their interest rates shot up from five percent to 15 percent in as little as three years. That problem has been averted with new lending regulations that resulted from that meltdown that put today’s borrowers on far firmer footing.

Today, it takes more than two years for most mortgages to adjust to their new interest rate—and if you try to refinance early, your lender will probably demand higher interest on a new loan. Of the 53.5 million first lien home mortgages in the USA today, the average borrower FICO credit score is a record high 751. It was 699 in 2010, 2 years after the financial sector’s meltdown. Lenders have been much more strict about lending, much of that reflected in credit quality.

Today’s Homeowners Have Record Amounts of Home Equity

Post-Covid data shows that tappable equity hit a record high of $11 trillion collectively this year, a 34% increase from 2021.Homeowners are able to take advantage of today’s low interest rates and boost their savings by refinancing. We could be in for yet another boom for home remodeling as homeowners cash out equity to fix up their homes. What’s more, a few years from now when we get another real estate correction (and we will), those who took advantage of record-high home equity will have put money away and bought themselves some safety if they choose to sell. In short, today’s high home equity levels open up many possibilities and opportunities. 

Mortgage Debt in the US is Now the Lowest on Record

Right now, Mortgage debt in the US is now less than 43% of current home values, the lowest on record. This means that homeowners will have access to more home equity for remodeling or moving up. If you are looking to sell your home now, there will be more money to work with. Negative equity is virtually nonexistent! 25% of borrowers who were under water in 2011 compared to now, with just 2.5% of borrowers having less than 10% equity in their homes. If you are looking to buy a home right now, now may be one of the best times ever to do so.

There are Currently 2.5 million Adjustable-Rate Mortgages Outstanding Today (About 8% of Active Mortgages) the Lowest Volume on Record

Just a decade ago, in 2004, ARMs were the most popular mortgages in the country. When ARM originations peaked in 2005 at $348 billion worth of new mortgages written that year, there were about $900 billion worth of ARMs outstanding. In 2007, just before the housing market crash, there were 13.1 million ARMs, representing 36% of all mortgages.  More than 80% of today’s ARM originations also operate under a fixed rate for the first 7-10 years. By last year's peak in home values, only 12% of total mortgage originations were ARMs; today, just 8% are active

ARMs Are Facing Higher Interest Rate Resets

While 1.4 million ARMs are currently facing higher rate resets, those borrowers will have to make higher monthly payments. According to a new report from real estate data and analytics company CoreLogic, about 1.4 million ARMs are currently scheduled to face higher rate resets post-Covid. That’s up from 2017, when just over 1 million resetting ARMs were at risk. This is a result of larger interest rate increases starting in 2014 and 2015. However, most borrowers will have to make higher monthly payments due to higher rate resets, not because their homes are worth less than their mortgages.

Mortgage Delinquencies are Now at a Record Low

Mortgage delinquencies are now at a record low, with just under 3% of mortgages past due. According to a quarterly report by Zillow and data provider Black Knight, there are just under 3% of mortgages past due in any stage of delinquency. Of those past due loans, 24% are 30 or more days past due, while nearly 50% have been delinquent for less than 15 days - the lowest number since 2011.

As Covid Vaccination Progresses, City Markets Continue to See an Uptick in Sales

Already city markets are seeing recovery as vaccination progresses, with condos and city-center properties seeing upticks in sales. Condos near city centers in Miami, Chicago and Boston have reported more renters looking to move into newer buildings with up-to-date amenities—which means construction is also beginning to increase for those buildings. Data continues to show a similar rise in condo sales as vaccination adoption efforts progress across the country.

Real Estate Markets in Florida Continue to Thrive

Florida markets have seen unprecedented activity in the real estate sector. Tax reform has driven many high-net-worth buyers to the market, which has created a snowball effect, and Covid-19 has accelerated the drivers to Florida. Real estate owners and operators across almost every asset class are considering several potential longer-term effects of the coronavirus outbreak and the required changes that these shifts are likely to bring.

People wanted to keep their homes in the city, but invest in a larger ‘safe haven’ home in the country or by the beach to use when needed. This shift in fundamental day-to-day life & working environments have caused other markets to see huge activity post-Covid. The flexibility of remote working and schooling means that holiday locations are now being considered as co-primary residences, so buyers want properties that are big enough, and have the amenities required for longer-term living.

Despite Covid-19, the fluctuating ups and downs of real estate have created a few pitfalls and many more opportunities for growth, expansion and transformation. If you’re ready to buy or sell in the markets, Miami Lifestyle Team can help you navigate through this unprecedented time with expert experience, time, & attention. Contact us today to learn more about how we can help you!

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