This is the first in a new HW+ series examining the distinctive challenges faced in state-level housing markets.
On March 19, California became the first state to issue a stay-at-home edict to halt the spread of COVID-19. While this resulted in shutting down much of the local economy, California’s housing and mortgage markets continued to operate, albeit within tighter parameters.
The most recent statewide housing statistics were issued on April 16 by the California Association of Realtors, covering the previous month just as the new COVID-19 era began to take root. CAR reported existing single-family home sales in March totaled 373,070, an 11.5% drop from February – the first double-digit month-over-month decline in nine years and the largest in nearly 13 years. The year-over-year 6.1% decline in sales was the first in nine months and the largest since March 2019.
CAR Senior Vice President and Chief Economist Leslie Appleton-Young observed that the majority of closed sales were negotiated during January and February, before the pandemic rolled in.
“I think we’re going to see another significant drop in sales in April,” she said, noting the March data did not include the historic job losses and economic mayhem that kicked off last month.
Appleton-Young also stated the median price for an existing single-family home in March was $612,440 – one year earlier, the price was $565,740 – but she predicted funding for the higher-priced homes could be problematic in the current environment.
“We’re about 20% jumbo in California,” she continued. “And as you know, that market has either tightened up or disappeared significantly.”
Audrey Boissonou, sales leader in the Walnut Creek office of Guarantee Mortgage and state president for California Association of Mortgage Professionals, is also dealing with jumbo problems in her Bay Area market.
“We’ve definitely had to pivot,” she said. “The company that I work with is very sensitive to the fact that we need jumbo financing. We have it available – there are outlets for it, but you definitely have to cross your T’s and dot your I’s and make sure you’re really clear about what the guidelines are. And you need to set expectations with your borrower so that when you get down the pike and something pops up, they’re not blown out of the water.”
The jumbo market is not the only concern to California’s mortgage industry. Bill Lowman, president and CEO of Roseville-based American Pacific Mortgage and residential president of the California Mortgage Bankers Association, reported warehouse lenders are starting to become more restrictive.
“There is that risk during the time gap between when the loan is funded and when the loan is sold,” he said. “Warehouse banks are tightening up there. A major warehouse bank in the industry won’t warehouse a loan if the borrower doesn’t have a 700 FICO minimum, while another warehouse bank raised their minimum FICO from 620 to 670. That is making it a challenge for the industry because they don’t want to assume any risk on loans that would be stuck on their line if the borrower goes into forbearance or loses their job.”
As the economic hardship created by the pandemic deepens, many California buyers and sellers have second thoughts on their activity – much to the mortgage professionals’ consternation.
“We saw purchases slow down and we saw cancellation of a lot of purchase contracts,” Lowman continued. “We’re seeing loans that are going through, but it is really challenging. We’re seeing up to four to six weeks for appraisal times. And we’ve seen borrowers start a purchase contract, lose their job and cancel their purchase contract. I think people are freaked out – and even if you’re still working, will you be working next week, next month? There’s just too much uncertainty right now to really drive housing.”
Boissonou is witnessing some degree of buying and selling in her Bay Area market, and she is also identifying a percolating level of near-future motion.
“You still have some Realtors who are proceeding and listing properties and you have offers happening, although not as much,” she said. “But I have clients who’ve been shopping for a year-plus and are calling me and saying, ‘I have been in this apartment and as soon as this is over, I need a house. I need to buy a place.’ So, I think there will be a lot of pent up demand once this is over.”
CAR’s Appleton-Young agreed that pent-up demand will uncork when the pandemic abates, but she theorized that not every market is going to be swept up with a new tide of buying and selling.
“There is an argument that people are going to be more interested in less dense housing and be more able to work remotely,” she said. “The far-flung suburbs will become more attractive and more doable for them because they won’t have to do the grinding commute, and housing is more affordable.”
While the quantity of affordable homeownership options was a problem in pre-pandemic California, Appleton-Young forecasted a potential shift in expanding homeownership opportunities for lower- and middle-income households thanks to possible changes in the commercial real estate sector.
“I’m putting my optimistic hat on, but I see the commercial and retail sector getting a body blow here, essentially in terms of people changing how they work and how they shop,” she explained. “That’s not going to go away. I think we’re going to see a significant drop in the demand for that kind of real estate. So, with my optimistic hat on, I see those properties transitioning to housing – and a lot of affordable housing. I think there is something to be hopeful for coming out of it.”
But at the moment, according to Lowman, current affordable homeownership options have also fallen victim to the pandemic.
“I think an unintended consequence is that many lenders have stopped doing bond loans,” he said. “It is because of some of the inherent risk in doing bond loans – they typically take three weeks to purchase. You have a three-week period of time between when a lender funds that loan and it’s accepted by the bond agency – and if the borrower loses their job in that period of time, the bond agency doesn’t have to accept that loan and the lender is stuck with that on their lines because of that risk. With first-time homebuyers, some warehouse banks have stopped allowing bond loans to be funded on their lines. So, it’s certainly restricting the access to credit on the affordable side.”
Despite the ongoing obstacles, Boissonou believes California’s mortgage professionals are up to today’s challenges.
“We’re loan officers and we’re very adaptable,” she said. “We figure things out. We can find a solution if we’re creative and our borrowers are flexible and willing.”