This post is Part 4 of a multi-part series on the impacts of COVID-19 on the Housing Markets. In Part 1, I laid the foundation for what we see in the different phases of the typical economic cycle for the housing markets.
In Part 2, we discussed the factors impacting the market today. For context, this was written in August 2020. As we covered in Part 1, pricing is a function of supply and demand.
In Part 3, we discussed why we think demand will drop off in 2021 due to instability of income.
In the post, we will discuss how we think COVID-19 will impact the supply of housing going forward. We think that the housing market is facing a huge wave of foreclosures in the tens of millions and here is why.
Remember that in Part 1 where we discussed the cycle, we talked about the recessionary phase and recovery phase. In the recessionary phase, prices are decreasing due to lower demand and bank foreclosures are increasing leading to an increase in supply. The recovery phase is when the supply finally decreases to match real demand.
In 2020, due to the sudden impact of the COVID-19 pandemic and the governments forcing the economy to shut down, the government also put a forbearance program in place. Here is how that program works. Anyone who could prove hardship could get an automatic 180 deferment of making their mortgage payments.
The earliest anyone could apply for this forbearance was late March to early April 2020 meaning those deferments start to expire in late September 2020.
However, if you can prove hardship still exists at the end of the first 180-day deferment, you can extend your forbearance for another 180 days. So, some people will be able to defer mortgage payments all the way through the first quarter of 2021.
Many people that were able to take advantage of the forbearance program will be able to start making mortgage payments after their 180-day deferment. However, there will be many people that won’t be able to prove hardship and yet also won’t be able to make their mortgage payments in full. This will be the beginning of the wave of foreclosures.
Some people in this situation will have equity in their homes and may try to sell quickly to scoop that equity out of their home to help them survive financially through this rough time. This will lead to an increase in inventory.
The foreclosure process does not happen quickly. Banks do not like to own real estate. They make their money by lending cash out to qualified borrowers, not from real estate owned (“REO”). So, banks will try to work out loans with some borrowers. But, eventually the banks foreclose on non-paying mortgages and take the house back. Then the banks try to unload this REO at whatever price they can get. This also causes an increase to inventory.
Due to the nature of the forbearance program being 180-day deferment with the potential to extend for another 180 days, mortgage payers could be rolling off forbearance anywhere from the 4th quarter of 2020 through the 2nd quarter of 2021. So, the foreclosure process could last from the 4th quarter of 2020 through and continuing past the 2nd quarter of 2021. We think this will lead to a significant increase in the supply side of the equation at least through the end of 2021.
Just like in 2008-2009, the banks will own millions and millions of houses and will be selling those houses to get cash. Depending on the number of REO properties and level of demand, this could take up to 2-3 years to work through the market. In the last recession, many experts in the field feel like the period from 2009 to approximately 2012 was a great time to be investing in housing.