What impact will the vaccine have on the housing market?

Question of the week:  How does a vaccine impact the housing market?

Answer: Last week’s Question of the Week was “Now What,” and we discussed the possible impact of the national elections on interest rates and markets. As I told real estate networking group in a presentation on Wednesday, all the predictions about the impact on markets as a result of the election go below the fold, so to speak, with the announcement by Pfizer on Monday that it has developed a vaccine for the Covid-19 coronavirus that they is testing at 90% effective.

Political impact on markets is typically long-term as it takes time for legislative and administrative policies and regulations to be enacted. Of course, there is a more immediate impact on prices of investments as investors react based on what they anticipate the impact of said policies and regulations. The actual impact takes time to wind through the bureaucratic processes of hearings, committees and arguments.

Social impact on markets is can be long-, medium- or short- term, though much faster today due to the ability to spread information and opinions quickly through social media and other electronic media. Most social impact on the economy comes through boycotts* and actions to raise attention to an issue. The economic impact can be somewhat isolated to a particular segment of the economy, or region. There have been many famous boycotts in our nation’s history that had political, social and economic impact. Two that immediately come to mind are the boycott of British goods prior to the Declaration of Independence and Revolutionary War, and the Montgomery Bus boycott.

Economic impact on markets can also be from short- to long-term, but are usually very quick. Consider the economic impact of the economic event of mortgage company in Irvine, New Century, not being able to sell its subprime mortgages to investors in February 2007. Within days investors stopped purchasing mortgages from other subprime lenders and the dominos started quickly falling. Within a short period of time housing markets across the country started shedding value, homeowners stopped making mortgage payments and our nation dropped into a deep recession that lasted from the 4th Quarter 2007 through the 2nd Quarter of 2009.

Other economic impact scenarios that had quick impact are the OPEC Oil Embargo in 1973 and the dotcom bubble burst in 2000. The former led to high inflation and interest rates, the latter the collapse of many companies, a sharp increase in unemployment in the tech industries, a tremendous loss of wealth (estimated at almost $7 trillion) for investors, and consolidation in the technology sector. It should be noted, technically the OPEC Oil Embargo was a political impact as the Arab members of OPEC were reacting to President Nixon asking Congress for several billion dollars for Israel to assist them in the Yom Kippur War.

Dennis, enough history, what about today and the future?

When state and local governments mandated shutdowns for many sectors of the economy the impact was a loss of over twenty-two million jobs. The economy has slowly been rebounding, and through October a little over twelve million jobs have been recovered. However, service industries such as hospitality, tourism and retail still bear the brunt of national unemployment. With the virus surging in many areas of the country, government officials are considering, or have already considered and implemented, reinstituting shutdowns of bars, restaurants, retail stores and other sectors of the economy. Such actions, of course, will result in more layoffs, permanent closing of businesses and a rebound to the rebound as the economy slows down.

Pfizer’s announcement this week of its new drug and its efficacy in trials has already had an economic impact as investors, looking into the future, pushed equity prices (stocks) and interest rates higher. Why?

Because most investors are not investing for today, or tomorrow, but for next month, next quarter and next year. While the increasing positive tests will likely result in shut downs throughout the nation, and resulting decline in economic activity, the strong possibility of a vaccine that will be available by, or before, the spring has investors reacting to higher employment and consumer spending.

Consider a quarter, half, almost all of our population being inoculated, and it being effective for 90% of those taking the vaccine. This will enable millions to go back to work. Very importantly it will enable schools to open, allowing parents to go back to their jobs.

An effective vaccine will lead to a boom in employment, a boom in consumer spending, a boom in the economy, and likely a rise in prices.

A vaccine will not just be a major boost to the American economy, but economies around the world.

Rates move up when the economy is growing, or expected to grow; and down when the economy is slowing, or expected to slow. With the expectatioin of “normal” returning to the economy, upward pressure is being put on interest rates. If prices increase and inflation pushes past 2%, I’ll say when, the Fed will start looking at increasing its benchmark interest rate.

Looking ahead, absent any major political events, policies, regulations that might disrupt the expectation of investors and consumers, a widely available and utilized vaccine will push the economy into strong growth, which will result in higher interest rates.

We have seen the impact that the historically low rates have had on the housing markets. Despite the pandemic and tends of millions being out of work, home sales were up from July, August and September 2019 by 8.7%, 10/1% and a whopping 20.9% respectively. Tens of millions unemployed, economy’s future somewhat questionable and sales boom. Why? Rates enabling 15-20% more buying power for home seekers.

Should my thoughts on rates increasing come to pass, the increase in home sales and prices will very likely slow. Will they decline? Unlikely in most areas of the nation, but in some of the very upper end markets there could be a lack of buyers that could soften prices and sales.

I for one will gladly trade rates going back up to 4-4.5% in exchange for the vast majority of our nation being vaccinated and our communities getting back as close to our previous normal as possible.

*Ever curious, I looked up the origin of the word “boycott.” Charles Cunningham Boycott put his name into our nomenclature with his actions in 1880.

Have a question? Ask me!

Rates for Friday November 13, 2020: Rates spiked higher early in the week on the Pfizer announcement, and three days of auctions of debt by the Treasury. The market turned slowly the last few days and we end the week level with last week’s rates.

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                                     2.50%   Flat

30 year high-balance conforming                      2.75%    Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Lots of thoughts this week for the final segment of the WR&MU, which I know is the only section many of you read (voyeurs! 😊). It’s the first Friday the 13th since March, and how did that go? This week was my triennial purchase of a new laptop, which means days of installing programs and transferring data. And Alex Trebek.

Several years ago, perhaps fifteen or more, for my birthday Leslie signed me up to tryout for Jeopardy! Like many, I kill it at home, answering questions from the comfy confines of my couch, perhaps with a beverage at hand. Leslie thought, hey why not try it?

I drove up to the Sony Studio complex and the group I was trying out with were led to the Jeopardy! set and seated in the audience section. Yes, it was very cool to see the set with Alex’s podium and those of the contestants.  Above the audience are two screens where the questions are projected for the audience as they are for home viewers.

One of the show’s crew told us we were going to be given a series of questions, all $1000 questions or higher, and a few seconds to record our answers. The answers are collected and graded and those who score over a certain percentage are then retained and put through the next stages, which include on stage, testing for energy, etc.

I did not make the cut. The questions did not have categories, which helps frame answers, there is a 10-15 second time frame to answer, and the pressure was intense. When all the scores were announced those of us who missed the cut were gathered together and escorted back through the sound stages, which were very neat to see.

As we were walking out a group was walking towards us. Our guide said, this group is going to tryout for Wheel of Fortune. As we passed by each other I heard someone from the WoF group say, “those are the smart people, they tried out for Jeopardy!”

To which I replied loud enough for all to hear, “Not that smart…you should see the ones still in studio.” A few of those in my losers group took some offense to that comment. Not sure why.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog