We continue to keep a close eye on the Southern California region's real estate market from our offices in Corona del Mar Newport Beach. While the coronavirus's longer-term impact on Southern California real estate remains dynamic and uncertain, there have been several notable developments since our March 23rd article, How the Coronavirus is Impacting Southern California Real Estate. Events described in greater detail below include- the effect of missed rent payments on tenants and landlords, California's eviction moratorium, current, and future mortgage forbearance programs, declining transaction volume, the record number of delisted properties, the growing demand for virtual showings, and several challenges facing home builders.
Missed Rent and Mortgage Payments Cascade Across the Southern California Real Estate Market.
In April, at least 24% of apartment renters were unable to pay rent, with at least one apartment data tracker, putting that number as high as 31%. This compares with 19% who had failed to make any payments as of March 5 and 17% failing to pay up by April 5th, 2019. Also, one in nine renters asked their landlord to lower their rent proactively, and nearly half of renters overall are planning to use their stimulus check. With social distancing measures likely to continue through the end of April, May rent delinquencies may likely be the same or higher, and according to analysis from the Urban Institute, renters would need $96 billion in payment assistance over the next six months.
It won't be much better for homeowners. There was a massive spike in requests to delay residential loan payments in March. The number of borrowers seeking home loan payment forbearance grew from 0.25% to 2.66% between March 2nd and April 1st. Requests grew by 1,270% between the week of March 2nd and the week of March 16th, and another 1,896% between the week of March 16th and the week of March 30th. Roughly 15 million households—about 30% of mortgage borrowers—could miss payments if the economy stays shuttered through the summer.
So far, local, state, and federal governments have responded by imposing temporary bans on foreclosures and evictions, dampening the short-term impact of the economic shutdown in the hope that social-distancing efforts ease later this spring and consumers and businesses get back on track. The Coronavirus Aid, Relief, and Economic Security Act, passed in March, will provide forbearance on government-backed mortgages. Homeowners are not the only ones who will need mortgage assistance. At least 2,600 commercial real estate borrowers have already touched base with mortgage servicers about potential debt relief on more than $49 billion in loans. Fannie Mae and Freddie Mac have already promised forbearance to apartment owners suffering hardship because of COVID-19 on the condition that the landlords pause evictions.
As investors adjust to the cascading effects stemming from reduced rental income, for multifamily property owners across Southern California, from San Diego, up through Orange County and Los Angeles, the situation is becoming increasingly urgent as a result of the temporary moratorium on evictions. Many owners of multifamily properties in Southern California, see these eviction moratoriums as carte blanche for not paying rent for any reason, placing the entire burden for housing people upon the backs of private citizens who own multifamily income properties. If there is a bright side in all of this for multifamily property owners, it would be that both Fannie Mae and Freddie Mac have announced forbearance measures for multifamily income property owners, but they differ in some key respects.
However, only a quarter of renters live in units financed with government-backed loans, so most multifamily income property owners will have to make arrangements with their lenders as collections fall. Small landlords in particular lack access to the cheap credit needed to weather the storm, and are unlikely to get the same level of forbearance as homeowners get.
It's not just apartment dwellers who can't pay rent. Marquis commercial tenants, including Subway Restaurants and Mattress Firm Holding Corp, have informed landlords that they may not be able to make rent payments in full. While The Cheesecake Factory has said it won't be paying April's rent for its nearly 300 restaurants across the country due to the coronavirus and Wendy's is deferring rent payment on properties it leases to franchisees by 50 percent over the next 90 days. For now, there is not a whole lot that commercial landlords can do: A global pandemic is a tough time to find a new tenant.
The bottom line here is that a lot of people aren't going to be able to pay rent for a long time. Everyone wants help from the government; the question is: Will a rescue be big enough and come fast enough? If the economy doesn't rebound quickly, however, those measures won't be enough. While buying us some time, a prolonged coronavirus-driven downturn would mean several months or years to get back to a new normal.
Real Estate Transaction Volume Plummets Throughout Southern California
The coronavirus has also resulted in a significant reduction in home buying/selling activity throughout Southern California. The latest data shows a 30% reduction in transaction volume, with homebuying plummeting to a 6-year low. Pre-coronavirus, the U.S. saw the lowest housing inventory since 2013. In January, the active listings of homes for sale fell 11.4% year over year, marking the most significant drop since March 2013 and the sixth consecutive month of declines. Both housing supply from homebuilders and demand from homebuyers in Southern California have declined. As the data below shows, there is no question that coronavirus is slowing Southern California homebuying.
Demand: 8,837 new escrows opened in the previous 30 days. That's down 30% in two weeks and down 33% in a year. January 2014 was the last time it was lower.
Supply: 24,107 homes listed on the market, up 0.4% in two weeks but down 31% in a year. It's the smallest inventory since November 2018.
County by county numbers:
Los Angeles County: 3,449 new escrows, down 31% in two weeks and down 35% in a year; 8,591 listings, down 0.7% in two weeks and down 33% in a year; market time was up to 75 days and up 23 days in two weeks and off two days in a year.
Orange County: 1,581 new escrows, down 34% in two weeks and down 35% in a year; 4,198 listings, up 0.9% in two weeks and down 39% in a year; market time was up to 80 days and up 28 days in two weeks but down five days in a year.
Riverside County: 2,126 new escrows, down 29% in two weeks and down 28% in a year; 6,808 listings, up 0.2% in two weeks and down 26% in a year; market time was up to 96 days and up 28 days in two weeks and three days higher in a year.
San Bernardino County: 1,681 new escrows, down 27% in two weeks and down 30% in a year; 4,510 listings, up 2.4% in two weeks and down 21% in a year; market time was up to 80 days and up 23 days in two weeks and up nine days in a year.
Demand Spikes for Virtual Showings as Homebuyers Shelter in Place
As more people are urged to stay home due to the coronavirus, there are still many buyers out there who are interested in purchasing a home. While many real estate companies have paused home showings, social distancing measures have increased the demand for virtual home showings.
Speaking from personal experience here, in the past, I used virtual tours almost exclusively to show my out of state buyers what a property looks like beyond the polished listing photos and property videos, both of which are usually professionally edited in a way that masks a lot of issues. During these video tours, I would become the eye of the buyer.
However, as local homebuyers who are still actively looking to buy a property continue to shelter in place, I have seen the demand for virtual showings increase by triple digits. I now find myself providing a dozen or more virtual showings per week for local clients who are sheltering in place. I'm talking more than I would on a traditional tour, pointing out things that would be obvious in-person but that aren't as clear through a camera lens, like the quality of finishes or workmanship on any repairs. I'm also taking measurements to determine if a room fits any specific pieces of furniture my buyer may want to put in there.
Number of Homes Taken off the Real Estate Market Doubles due to coronavirus
While open houses have gone down and 3D or virtual home tours have gone up, a significant number of homes that were on the market before coronavirus have been taken off the market, and the number of listings hitting the market has also declined. With record-high unemployment claims and economic uncertainty in the backdrop, the housing supply is dwindling now more than ever. During the week ending March 29th, there was a 148% year-over-year increase in homes being delisted, totaling 28,140 homes being pulled off the market. About 4% of homes were removed from the market during that seven-day period, which is approximately two times the average number of homes that would have been taken off the market under normal circumstances.
While the number of homes taken off the market varied by region, from 2% to up to 6% of active home listings taken off the market, nationally, during the week ending March 29th, there were 58,366 new home listings, marking a 33% drop from the year prior.
With pending home sales falling 42% from the year prior during the week ending March 29th, the remaining inventory of homes for sale on the market were being listed for 6.8% less than they were just before the pandemic began wreaking havoc on the real estate market and the broader economy.
Homebuilders Struggle as Housing Starts Decline.
It should come as no surprise given the impact that the coronavirus has had on just about everything, that housing starts and homebuilder confidence have both declined in recent days. Based on responses from a survey completed by the Association of General Contractors of America (AGC), the novel coronavirus has triggered layoffs at more than a quarter of firms that responded, and according to the National Association of Home Builders, construction employment dipped by 29,000 over the past few weeks.
Included in that latter figure is a decrease in 4,300 residential construction jobs, which comes on the heels of an employment increase of 24,100 in February.
Project delays are also the norm during these days of social distancing. In an AGC poll conducted last week, 53% of respondents said that a project owner asked for their project to be delayed (for an average of 30 days), while 7% of projects were canceled entirely. It's worth noting that President Donald Trump is enforcing social distancing guidelines through the end of April, and just yesterday, L.A. County extended its stay-at-home order until May 15th.
Adding to the difficulties that homebuilders are experiencing, 62% of those surveyed said they expect material suppliers to be late or just flat out cancel deliveries.
Around 50% or more of those who took part in the survey said they saw heightened safety requirements, with 93% saying they have integrated social distancing into their operations, followed by another 81% saying there is an increased number of handwashing and hand sanitizer stations at their workplace, and 83% said they donated masks to medical professionals and first responders.
Our assessment of where we are today
We all know that precious metals offer industrial use as far as intrinsic value is concerned. Property ownership can also be valuable because homes are scarce and necessary. While the real estate market faltered during the subprime mortgage crisis, and then again briefly in 2017, real estate income properties have always produced revenue and profits. They have offered one of the best risk-adjusted returns of the major asset classes.
From my vantage point, it seems like sellers who can afford to weather the storm are taking their properties off the market, while those who need to sell for one reason, or another are reducing their asking price. The latter brings me to the crux of my assessment, and how I'm viewing the real estate market at this moment in time. Be patient, and be prepared to jump on the right opportunity, because we are heading into what I believe will be a highly profitable, yet, opportunistic time in real estate for those who can afford to take advantage of the opportunities that arise.
I certainly don't have a crystal ball, and there are undoubtedly a lot of moving parts with a cloud of uncertainty looming over just about everything these days. Still, if we can agree that the longer it takes to get the coronavirus under control, the longer it will take for the overall economy to recover from it. Then, we should track developments related to containing the novel virus, and we should prepare ourselves to enter a potentially short-lived, target-rich, and highly opportunistic real estate environment. In short, don't panic. Be patient and ready to strike when the right opportunity presents itself. Buy low and sell high when the economy recovers, which it is bound to do.
You might also want to read the following articles for more information about how the coronavirus is impacting the Southern California real estate market, and some helpful tips for home buyers, homeowners, owners of investment properties, and seller of a home or investment property, can make the most of this new real estate market.
About the author: Omid Yousofi, is a Realtor and Principal Partner of Titan Pacific Group, Inc., a real estate sales and investment firm based in Corona del Mar (Newport Beach), California. He has a proven track record of success representing buyers, sellers, and investors of residential, multifamily, and commercial real estate throughout Southern California with a focus on Orange County, San Diego County, and Los Angeles County. Omid's ability to guide his clients toward success throughout such a wide-array of real estate property classifications stems from his extensive and diverse background of educational and career experiences which includes earning a Bachelor of Sciences degree in civil engineering with an emphasis in construction management from the University of Southern California as well as a Juris Doctorate in Law from the Thomas Jefferson School of Law. Licensed by the California Department of Realtors in 2005, Omid's accomplishments include receiving HomeLight's Top Negotiator Award, for among other things, negotiating the single largest purchase price reduction in Newport Beach (as a Buyer's Agent) and for setting the second-highest price per square foot sale in the city of Mountain View (as a Listing Agent). Omid is also a Best of HomeLight award recipient, which is reserved for the top 1% of Realtors based on closed sales volume. Omid’s professional experience includes leading Southern California Infrastructure sales for a Fortune 150 Company (the largest publicly traded engineering, procurement, construction and public-private-partnership developer in the world).