Federal government shutdown effect on real estate sector

Government shutdown impact on real estate investors
by Team Stessa, posted in Newsletter

The Stessa Weekly Newsletter is hand-curated every week to bring you insightful accounts of new features, investing tips, business insights, and market trends from the real estate ecosystem. This week, we will cover how the government shutdown is affecting renters and homeowners, how interest rates are dropping despite the Fed prediction of two hikes in 2019, and the creative ways first-time homebuyers buy properties.

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Government shutdown effect on real estate

With the barrage of news about the ongoing partial Federal Government shutdown, we’d like to touch on a few implications for housing market watchers.

According to the National Association of Realtors, the government shutdown “includes some federal housing, mortgage, and other programs of interest to the real estate industry.” For instance, the Federal Housing Authority “will not make new commitments in the Multi-family Program during the shutdown.” Also, “The IRS will close and suspend the processing of all forms, including requests for tax return transcripts (Form 4506T).” These forms are required by many lenders for various types of loans.

Indeed, Suzy Khimm and Laura Strickler​ of NBC News reported today that “​Federal contracts for more than 1,000 government-funded properties that house low-income renters have already expired as a result of the government shutdown.” This could delay repairs and place families at risk of eviction, according to their reports.

In citing a report from Zillow, Jim Tankersley of The New York Times reports that “800,000 federal workers, many of whom will miss their first paycheck this week, owe a combined $249 million in monthly mortgage payments.”

Annie Nova from CNBC reports on how these federal workers are now struggling to make rent and mortgage payments, and how many of the banks and landlords are being forced to step in and work on alternative payment strategies with homeowners and renters.

Another major issue is the federal flood insurance program, which currently isn’t issuing new policies. According to Florida Trend, “The current federal government shutdown has created a backlog of closings for home sales in South Florida. The shutdown affected FEMA, which led to a suspension of new policies in the federal flood insurance program. Without flood insurance, closings started backing up until Congress stepped in to fund the program right before the new year.”

A note on future interest rates

Michael S. Derby of The Wall Street Journal reported this week that the expected Federal Reserve rate hikes are looking less likely in 2019 amidst mounting negative economic sentiment. “The Fed already was expecting the economy to slow this year after a hot 2018, and the rate rises it projects for 2019 are under the four made in 2018. But it now looks that even two rate increases may be difficult to pull off.”

Further, Kathy Orton from The Washington Post also reported this week that “For more than a month, mortgage rates have been in a free fall. Stock market volatility, global trade worries and the government shutdown are pushing rates down to their lowest levels since August.” Orton points to Freddie Mac data released Thursday, which shows that the 30-year fixed-rate average dropped again to 4.51 percent. By comparison, this was 4.55 percent a week ago.

Source: Washington Post

Ben Eisen and Laura Kusisto from The Wall Street Journal reported Monday on the issue, noting that “Mortgage rates have fallen to around their lowest levels in eight months, offering a potential boost to the housing market after a rough patch in recent months.” The authors note that lower rates will give consumers—and real estate investors—another shot at obtaining low rates if they “stomach volatile financial markets and still lofty home values.”

Diana Olick of CNBC reported that mortgage applications were down nearly 10% to end 2018, despite the lower rates. Olick notes that mortgage application volume was 21% lower than a year ago, and the lowest level in 18 years. This has led many commentators to note that 2019 will be a buyer’s market, with Apartment Therapy’s Rebecca Renner noting that “experts predict that this year’s real estate market may swing in favor of buyers.”

First-time homebuyers getting creative amidst high prices

In its annual report to Congress, the U.S. Department of Housing and Urban Development provided key insight into first-time homebuyers in the U.S., and it has important implications for investors. For instance, Ben Eisen of The Wall Street Journal reports that over “26% of mortgage borrowers who used FHA-insured loans got assistance from a relative to make the down payment in the 12 months through September, up from about 22% in 2011.” 

Source: WSJ

This means that more first-time buyers are getting creative, and turning to Mom and Dad amidst higher prices in most metro areas.

Glenn Kelman, CEO of real estate brokerage Redfin, predicts that 2019 will be a bad year for first-time home buyers, as they continue to struggle to buy a home due to higher mortgage interest rates and low for-sale inventory. There’s so much inventory that’s rate-locked,” Kelman said in an interview with the Associated Press. “The spread between 3.5% and the current mortgage rate, as that widens, it will just be a stronger and stronger incentive for people to hold on to their homes forever. When they want to move, they’re going to rent them out, rather than sell them.”

So where are the younger generations most interested in buying homes if they do so in 2019? According to Meghan Johnson of Apartment Therapy, half of millennial home purchases occurred in just three major urban centers. These were Salt Lake City, with 51% percent of millennials making mortgage requests in that city, as well as Minneapolis, Minnesota, and Pittsburgh, Pennsylvania.

For real estate investors focused on rent-to-own and other creative ownership strategies, 2019 may present more opportunity with all the challenges facing first-time homebuyers.