Lending Tightens During the Lockdown.

Comparing Two Crises.

I have read quite a few articles where people compare the state of the economy now to the Great Recession of 2008.  For many people, there are probably some unfortunate similarities — the loss of employment, economic hardships, an uncertain future, and now add in a mix of a deadly health scare to round out the bad news.

But with regard to the real estate market, there are very few similarities between the Great Recession and the Great Pandemic.

First, the real estate market itself was one of the key factors that drove us into the Recession of 2008.  Unchecked predatory lending and the indexing of subprime loans drove the housing market right over a cliff.  The challenges that we are facing today have nothing to do with the real estate market, and everything to do with an economy that was brought to its knees by an organism too small to see with the naked eye.

The other key difference the effect on home prices.   When the Recession hit, the bottom literally fell out of the market overnight, with home values toppling from as little as 15% to over 50% in the hardest hit areas.  There was no region or neighborhood in the country that didn't take a hit.  Contrast that to the market today — despite the fact that far fewer homes are selling,  home prices haven't dropped very much at all since the beginning of the pandemic.  In fact, Lawrence Yun, chief economist at the National Association of Realtors predicted that home values would not fall at all this year, but “are likely to squeeze out a gain in 2020 to a new record high.” Yun said prices would increase 1.3% for the year, with local market variations.

But there IS one key similarity between the Recession and the Pandemic that hurt both markets in just about the same manner:  Availability of funding.

Jumbo Funding Hit Hard.

In 2008 and again in 2020, banks reacted to the pivoting economy by dramatically tightening their lending standard for their jumbo loan products, which is any loan greater than $726,525.  Because of the high house prices in the Bay Area, those jumbo loans make up the vast majority of the mortgages that are written every year, and they are once again going to be a bit more difficult to get for the next few months.

Here are some examples of the changes that I'm seeing right now in the market:

1. Lower LTV Ratios:  Only two months ago,  you could have easily found a loan for a $2,000,000 home that only required you to put down 20% — or in other words, a loan-to-value (LTV) ratio of 80%.   Many lenders have since gone much more conservative and are requiring buyers to bring more cash to the table.  I've heard of LTV ratios going as low as 65% for larger loans — meaning that the buyer has to pony up a full 35% to close the deal.
2. Higher Credit Scores:  Most banks have raised their minimum FICO score threshold that's required to qualify for a loan.  700 was the old watermark for many banks, but it's going to take 720-725 minimum to qualify in this market.
3. Fewer Lenders.  Some banks that don't originate their own funding simply aren't offering jumbo financing right now.  Others will require that you have significant funds in a deposit account with them before they will even consider you for a jumbo loan.  For Wells Fargo, you need to have a minimum of $250,000 in a WFB account before they'll consider you.

What Does This Mean for You?

Unfortunately, these lending restrictions are making all-cash offers more compelling than they were in the pre-pandemic days.  But all is not lost if you're looking for a loan right now — far from it!  The playing field has changed for all lenders, and some are responding to that change better than others.  You can definitely find jumbo lending in this market, but you're going to have to shop around a bit more to find a lender with loan options that work best for you.  I have a number of lenders who are performing very well in this new environment, and I'm happy to share them with you.

Finally, remember that interest rates are still incredibly low by historical standards, so don't let these temporary challenges deter you from your dream of home ownership!