As the housing market continues to reach new heights, there are reasonable fears that current prices are not sustainable. Media and real estate investment around the world, the housing market is talking about a catastrophe in the coming months.
When imagining which (many) could be the catalyst for price reduction, one of the most notable is the potential foreclosure crisis. As the Covid-19 19-induced foreclosure suspension goes into its sixteenth month, many fear that once the suspension is lifted, a rapid increase in home supplies will hit the market and bring down prices.
But will it happen? Could post-epidemic recovery be hampered by a foreclosure crisis like the one in 2007? Or have collaborative efforts worked to expand tolerance availability between donors and the government?
Let’s see what the numbers say about the possibility of a foreclosure crisis and whether it could make a big difference in the US housing market.
Covid-1 shook many sectors of the economy and almost nothing was as effective as the massive rise in unemployment that shook the United States during the first lockdown.
With this came a very reasonable fear that there would be massive foreclosures in the housing market because homeowners would not be able to afford their mortgages.
For example, the government (both federal and local) imposes restrictions on foreclosures and evictions. Instead of banks making predictions on customers, the government and the housing industry work together to develop a tolerance program that allows homeowners to temporarily reduce or eliminate their payments.
Tolerance programs do not exclude recipients from their. Rather, tolerance allows homeowners to reduce or even eliminate their mortgage costs, while giving them weather in challenging economic conditions.
When this plan was announced, many people took advantage. At its peak in June 2020, the Tolerance Program owned an estimated 3. million million homeowners. At the time, there were many fears that it could spiral out of control and cause another housing market to crash.
After all, foreclosures played a huge role in the 2007 housing market crash and people were understandably concerned.
There are still many. There are many pundits out there who say that the housing market is going to collapse with the lifting of the foreclosure ban.
But the information suggests otherwise. In my opinion, there are three reasons why we may not see a foreclosure crisis at the end of the moratorium as we saw in 2007.
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1. Tolerance is working
The number of tolerance loans has been steadily declining. Week after week, we see data from the Mortgage Bankers Association which shows a decrease in the number of tolerances.
About 4.3 million loans were tolerable at this time last year. Now, there are about 1.75 million. Things are getting better consistently, and that trend is likely to continue. In fact, the fall rate seems to be accelerating late.
Moreover, the loans that are coming out of tolerance, it is estimated that 85-90% of homeowners are in a good position.
But of course, there is still the question of 1.755 million loans. And what will happen there is still somewhat unclear.
Some people believe that these loans are the most risky. If they are still tolerant, it is probably because they will be able to pay the least. That could happen.
On the other hand, some believe that these remaining loans are tolerable as long as possible, even if they can resume payments as originally scheduled. Leaving tolerance late and accelerating loans makes this theory credible – because the moratorium is coming to an end, people are finally forced to lose patience.
Personally, I think it’s a bit of both. There are probably a lot of risky loans left out of the 1.75 million loans, but some are probably just about to come out.
But with those risky loans, I still don’t think we’re going to see a huge flood of evictions because of the second data point here.
The current employment situation in the United States is very different from 2007-2007. There is already evidence that wages have begun to rise, probably due to inflation, and that should be expected to help people get back on their feet.
In 2007, the entire economy collapsed, and unemployment began to rise in May 2007, and by 2019 it had risen to about 10%.
Now the situation is different. Unemployment was low.5% before Covid-19. It didn’t see anything up to about 15% before last spring, but it has quickly dropped below 6%. Job recovery at this time is much, much faster. It took seven years to get back below 6% after the Great Recession. This time it took a year.
And although the number of jobs has been weakening over the past few months, unemployment is expected to continue to decline. There are about 9 million jobs open here (the chart above is only through Q1 2021, and it has increased), which is more than the total number of job seekers.
For the housing market, this means that most people will be able to find work, and therefore will be more likely to pay off their mortgages. The worst of the unemployment crisis has been tolerated, so many people’s homes have been saved.
3. Loan value
After all, the value of loans has skyrocketed since the Great Depression. The main reason for the collapse of housing in 2007 was that banks provided extra risky loans to ineligible borrowers.
After that crisis, rules were enacted to reduce the risk of another sub-prime meldown. And it works. The number of risky loans has decreased in the last one decade. View this data from the Bureau of Consumer Financial Protection.
Unfortunately, the data doesn’t go back to the financial crisis, but you can see that the amount of people mortgaging the most mortgage risk is about half of what it was after the Great Depression.
There is a lot more information in the link above if you want to check it out. But simply to say, the quality of loans is higher, so it is likely that less borrowers will now default than in 2007.
Mortgages are declining in tolerance, there is a strong job market to support homeowners, and the tolerances that exist for them are less risky than forecasting a recession.
For all these reasons, I don’t think we’ll see a huge flow of foreclosures in the coming months. Yes, when the foreclosure ban is lifted in late July, there will be an upsurge in foreclosure activity – no doubt about it.
But I’m guessing that a fraction of the 1.75 million loans will still be closed in tolerance. My guess could end up in about half the foreclosure.
That’s a lot, and it will probably slow down the real estate market, but in my opinion it’s less likely to be a real estate market crash.
For reference, the foreclosure at the height of the Great Depression was 2.8 million per year. In 2020, there were only 216,000 foreclosures – a number that is artificially low due to the ban. Even if we see growth up to 1 million foreclosures in 2021, it will be the 2015-2016 level সময় a time when the housing market is growing rapidly.
So the next time you tell someone that there is going to be a big foreclosure crisis, remember that numbers tell a different story. Yes, foreclosures will increase, but numbers will not come close to where we were in the Great Depression. This will probably cool the housing market and not cause an accident