The Ripple Effect of the Government Shutdown on Real Estate by Barbara Pearce

Plenty has been written about the downsides of the current shutdown of the Federal government, but sometimes people get confused about where there are delays or closures, and where business is still being done.  However, I’d like to begin with the big picture:  Uncertainty is bad for business.  If costs go down or stay the same, that’s great for us.  If costs, or interest rates, rise, we can also budget for that.  What people really don’t seem to like to do is guess about the future.  Therefore, politics impinges on real estate sales whenever buyers and sellers are unsure what will happen in the near to medium term.  Interest rate increases are a good example.  When they start to go up, it often spurs sales, because buyers can see that costs are rising, and they act in order to limit those increases. 

Lost wages probably have the greatest direct effect.  Between the worry and the reality, people have enough to think about, and real estate can, and sometimes must, go on the back burner.  In the case of some nonessential and contract workers, the loss of wages may be permanent, in that they will never be paid for the weeks of the shutdown.  Even those who will eventually be paid may clearly have cash flow issues.

Now, let’s turn to ongoing transactions.  Fannie Mae and Freddie Mac are private entities, so they are still doing business, as is the VA, but USDA loans are out for the present. FHA loans are expected to take longer.  But, if you need information or documents from Social Security or the IRS, regardless of loan type, get in line and prepare to wait.  Flood insurance is apparently being processed normally.

For rental properties, Section 8 is a real dilemma.  Each office supposedly will run out of money for vouchers at different times, but all will run out eventually.  Landlords can, I guess, evict tenants, but their replacements won’t have vouchers either, and landlords will still have to plow and heat the premises, among other things.  Cash flow may become a big problem.  Regular tenants may not be able to pay, and that’s even trickier, since they won’t be getting retroactive vouchers when the shutdown is over, so landlords may have to make tough decisions. 

This is not a complete list, or a certain one, but food for thought.

 

Interest Rate Update

Now that the weather has moderated a little, we're starting to see some activity in the real estate market. One question on everyone's mind is the forecast for interest rates over the next few months. It's particularly true for those who are refinancing, since some banks allow you to take one "drop" between commitment and closing. Therefore, people want to know whether rates will go down more.

Of course, the correct answer is: Who knows? But I think most betting people feel that the governmental stimulus and drive to improve the economy will result in incentives of every kind that could possibly help the housing market. That would argue for lower rates to come. I don't think they'll be much lower, or for much longer, since banks are paying 5% for the TARP money. So how long can they really afford to loan it out at less than 5%?

So, if they are going to go down to 4 and 1/2, even for a little while, why not wait? The answer to that lies in the fine print. Fannie Mae, which drives a lot of bank lending policy, has quietly been raising the standards on loans. FICO credit scores to qualify for the best rates are rising, and higher rates are imposed when there is a higher loan-to-value ratio being sought. Translation: The rate might be slightly lower for some amount of time, but it will be harder for most people without excellent credit and enough cash for a substantial downpayment to qualify for that rate. When you take those factors into account, you will almost certainly come down on the side of buying or refinancing as soon as possible.

I should point out, in the nature of a disclaimer, that I do not have Obama's private Blackberry address, so these thoughts are my own, based upon reading public materials! And, given all that's going on, I'm sure there will be more news to follow.