Will the Shutdown Hurt Austin Real Estate?

Isn’t that the million dollar question?

Many parts of the Federal government shutdown on October 1st, 2013 and as a result, around 800,000 federal workers are furloughed (not working) and another million are currently working without pay. Many government websites are turned off, many consumer-help phone lines aren’t being answered, and most critically, lots and lots of paperwork is not being processed.

How does that impact Austin real estate?

Let’s talk specifics, about the stuff we “know”: most single-family properties are bought with cash, or financed, or some combination of the two (and some much smaller number have other arrangements for their transfer, but that is a different topic).

When a house is sold, the buyer and seller don’t just shake hands and hand over the deed. Lots of paperwork has to be processed: paperwork that confirms the seller has the right to sell, paperwork that confirms the buyer has the ability to buy, paperwork that records the sale in the public records and so on. Some of that paperwork is handled by banks, some by title companies, some by governmental agencies and lots more is handled by people in all sorts of other positions – it’s not a simple process, even for the simplest of transactions.

If the government isn’t open for business, some of the paperwork for home purchases can’t be processed, and some transactions will stall, or fail.

Let’s talk about some of the actual numbers for Austin-area home sales and how they could be impacted by the shutdown of the Federal government.

How the Shutdown Can Impact Cash Sales (Homes Purchased for Cash)

According to the Austin Board of REALTORS (ABOR), 3,409 single-family homes sold in the city of Austin in the 3 months before the shutdown (July, August and September of 2013). (3,409 were listed in the MLS, so the actual number is higher). Of these, 693 sold for cash (about 20%). Although cash transaction still have a lot of formal paperwork (they still have to go through a title company, for example), they don’t generally depend on government paperwork to qualify the buyer’s ability to purchase the property (which is often the case with financed purchases).

Of course, that 3-month period is before the shutdown, but it gives you an idea of the number of properties that changed hands in that amount of time . . . and an idea of the number that might change hands in the coming months. And yes, we can talk about all sorts of related topics (consumer confidence, interest rates, changes in unemployment numbers that will all shift depending on what happens in Washington over the coming weeks – but let’s save those for another article, or the comments on this one).

Some of those 693 cash sales in Austin in July, August and September of 2013 were HUD-owned properties. HUD is the US Department of Housing and Urban Development. If the owner of a home with a federally-backed mortgage defaults, HUD ends up with the home, which is then re-sold.

Of those 693 cash sales in Austin in the last 90 days, 30 were foreclosures, and of those, 9 were HUD homes (and one was owned by the VA).

So, it seems reasonable to suggest that the government shutdown, had it been in effect during that 3-month period, would have only directly impacted a smaller percentage of the cash purchases in the Austin area. During the shutdown, HUD is running on a skeleton staff (beware, that link is a download of the actual HUD contingency plan for the shutdown), with only 4% of employees still on the job (349 out of 8,709 employees). That means that HUD doesn’t have many people to process the paperwork necessary to sell a HUD-owned home, but these sales are only a small number of the overall sales figures for single-family cash purchases in the city of Austin.

(I’d really like to hear from people that can explain some of the areas where cash sales intersect with governmental agencies, and how the shutdown could impact these sales in the coming weeks or months. If you’re a cash buyer, investor, or part of the chain of folks necessary to get a deal closed, please send me email, comment in the comments, and so on, to get this discussion going. And, of course, if you’re not in that chain, but still interested in the topic, please weigh in.)

Financed Purchases are a Whole Different Ballgame

Most home purchases are financed.

Financing the purchase of a home requires a lot of formal paperwork processing, and some of that paperwork is processed at the Federal level (the part of the government impacted by the shutdown). One of the forms most lenders use to verify income is Form 4506-T (Request for Transcript of Tax Return) that comes from the IRS. During the shutdown, the IRS isn’t generating those forms. For purchases already well underway at the time of the shutdown, the forms were probably already in-hand (received back from the IRS) and the processing of those loans can proceed. For other transactions, the applications for those IRS forms are piling up and there will be a backlog that need attention when the government reopens. The longer the shutdown, the bigger the pile, the longer the delay. Fortunately, some lenders have workarounds in place (see last paragraph).

So, most financed purchases need forms from the government (the IRS) that aren’t being processed right now. And some of those purchases also need FHA case numbers, if the financing is an FHA loan. (In addition to processing paperwork to sell HUD-owned homes, HUD also produces FHA case numbers for homes that are purchased with an FHA loan.)

What kind of numbers are we talking about, for financed home purchases in Austin that requires some paperwork from a governmental agency impacted by the shutdown?

Of the 3,409 closed sales in the 3rd quarter of 2013 (July, August and September of 2013), we’ve seen that 673 were cash purchases, a small number of which would have been impacted by the shutdown.

That means up to 2,736 single-family homes sold in Austin that needed some type of financing. Of those, 273 were bought with FHA financing and another 102 had a VA loan. Without getting in to the specifics of those loan programs, the takeaway from that number is that at least 13.7% (375 of 2,736 purchases) of the non-cash purchases required at least some interaction with Federal agencies in some way for the transaction to go through.

Add to that the loans where the lenders required Form 4506-T from the IRS to proceed. Not all lenders require this form (during period of normal government operations), but many do as they seek to reduce the risk of borrowers being unable to repay home loans. During the shutdown, some lenders will proceed without the form (and verify later), but others won’t. That last link is a really facts-dense link but the details in it are critical: it explains specifically the stance adopted by some of the nation’s biggest lenders on how they will proceed with regards to Form 4506-T during the shutdown. Some
are requiring the tax transcripts to have already been pulled (the results of Form 4506-T) while others are requiring just that the signed forms be in the loan application file, with the transcripts being pulled later. The lenders’ stances are, of course, based on the underlying requirements of other agencies and entities to which they may later re-sell the loans (if the lender re-sells the loans, not all do).

You Can Still Buy a Home in Austin During the Shutdown

If you are in the market to buy a home in the Austin area, make sure you call your lender and ask specifically about which parts of the loan process might be impacted by the shutdown. Listen carefully to the answers, and make sure that you and your real estate agent write the contract in a way that allows enough time to accommodate potential delays. Fortunately, the standard TREC contract for purchasing single-family homes in Texas is very specific about the timeframes for performance, including specific language on financing. When you have a good agent and a good lender on your team, your transaction has a better chance of going through with fewer hiccups. That is true during “normal” home buying periods, and especially true during this shutdown.