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  • Writer's picturePayton Legal Group

Wave of foreclosures may follow housing boom

The housing market is booming. Is this another indication that the recovery from the Pandemic Recession is complete for the rich, while low-income households are left behind? No, it isn’t.

It’s primarily driven by the usual suspects in any market: supply and demand. But serious challenges are looming for low-income homeowners. Expect a wave of foreclosures in 2021.

A slew of recent data shows that in the U.S., housing is going gangbusters. Sales of existing homes increased by 9.4% in September to 6.6 million units on an annual basis, its highest level since May 2006. The median existing-home price was 14.8% higher than in September 2019.

New-home sales slipped in September relative to August, but are up 32.1% over the year. Seven in 10 homes sold in September were on the market for less than one month. In 20 metropolitan areas — including Phoenix, Seattle and San Diego — home prices rose more in August than in any month in the past two years. The AEI Housing Center’s Home Price Appreciation Index shows 8.6% annual gains in September, up from 5% in September 2019.

All told, housing could be one of the few sectors of the U.S. economy to make a positive contribution to overall economic growth this year.

Why? These impressive gains are not driven primarily by a “K-shaped” recovery from the Pandemic Recession, in which high-income households are seeing gains while lower-income households continue to struggle. Instead, the main reason housing is doing so well is the combination of strong housing demand and limited supply, both of which have roots that predate the onset of the pandemic.

Let’s start with demand. Going into the pandemic, the market was very tight: 1.1% of owner-occupied housing was vacant and for sale in the first quarter of 2020, lower than it had been in three decades. The rate has continued to drop, hitting 0.9% in the third quarter of this year. The rental vacancy rate has been very low as well.

Low mortgage rates have fueled demand. The housing sector is relatively sensitive to interest rates, and mortgage costs — already low before the pandemic began — are at rock bottom, driven to current lows by the Federal Reserve’s rate cuts and asset purchases. As of Oct. 22, the average 30-year fixed-rate mortgage was 2.8%, down from 3.75% a year before. Fifteen-year fixed-rate mortgages have been below 2.75% since the beginning of May.

The pandemic likely has affected the timing of demand. Housing starts and sales of new and existing homes were lower in the spring and summer than they were at the beginning of the year, giving the market a short-term boost this fall from pent-up demand.

There is additional demand as well. A survey found that the pandemic has led 41% of respondents to look to buy a home sooner than they had planned; only 15% said they were putting it off. Potential buyers under the age of 35 and living in urban areas were more likely to accelerate their plans, suggesting that housing demand is benefiting from people who want more living space to cope with the pandemic.

What about supply? The National Association of Home Builders Housing Market Index rates market conditions for the sale of new homes. It reached an all-time high this month, indicating a strong degree of confidence among builders. In September, permits to build new homes were issued at their fastest pace in 13 years. Housing starts hit an annual rate of 1.4 million in September, an 11% gain relative to September 2019. In addition, housing is affected less by the pandemic than other sectors because construction is an outdoor activity, putting workers at less risk of contracting the virus.

Despite this confidence and construction, the available supply of new houses is down considerably. The U.S. Census Bureau computes the ratio of houses on the market to those sold, indicating how long the current inventory for sale would last in the absence of new construction, given the current sales rate. In September, there were 3.6 months’ worth of houses for sale, up from 3.4 months in August, but down considerably from 5.5 months in February. This measure of supply is lower than it has been since March 2004. The AEI Housing Center estimates a little over two months’ worth of housing inventory in September.

So when we see the headlines about spiking real-estate prices, the imbalance in supply and demand is the story behind them.

That said, the “K-shaped” recovery does play a role in some of these patterns. Weak labor markets are typically a headwind for the housing sector. But job losses have been concentrated among low-wage workers who are less likely to purchase houses. The unemployment rate for college graduates is 4.8%, considerably lower than the overall rate of 7.9%.

A wave of foreclosures is likely coming that will hit low-income homeowners. As of August, over 10% of the eight million single-family mortgages backed by the Federal Housing Administration were delinquent by more than three months.

According to the FHA, the reason for 86% of those delinquencies was “a national emergency,” a category that includes the pandemic. These delinquencies are heavily concentrated among loans associated with low credit scores.

At the same time, the FHA reports that foreclosures have ground to a halt. In August, 352 foreclosures were started, compared with 10,438 in February.

An important explanation for why there are so few foreclosures amid so many delinquencies can be found in the Cares Act, the economic recovery law passed in March. It included forbearance provisions that allowed borrowers with government-backed mortgages to postpone (or reduce) payments for up to 12 months if they suffered Covid-related financial hardship.

When these forbearance provisions expire in 2021, expect a wave of foreclosures to follow.

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