Good News on the Foreclosure Front
The United States is in the middle of an incredible real estate market run. Home prices have skyrocketed about 15% from early 2020 prices. Most of which is due to a buying frenzy as home inventories have remained very low. The buying frenzy has been fueled by historically low mortgage rates. The house buying boom has flown in the face of expectations by many experts at the beginning of the pandemic. However, negative expectations regarding the impact of the pandemic on the housing market have been wrong. Current homeowners and new homebuyers have taken advantage of low mortgage rates and are benefiting from rising home values. Real estate naysayers were expecting the housing market to crash because of a tsunami of potential foreclosures that would flood the market with a bunch of cheap houses. This foreclosure wave never materialized and recent good news about foreclosures means it won’t anytime soon.
The Reasoning Behind the Foreclosure Fears
In order to understand why recent news regarding foreclosures is so good for the real estate market, it is necessary to understand the reasoning behind last year’s foreclosure fears. Early in the pandemic, there were a lot of predictions that the real estate market would see a crash similar to 2008. At the time, the logic made sense. The idea was that the pandemic would lay waste to the economy and cause many industries to shutter as efforts to control the virus increased. This prediction was not necessarily wrong. Many industries did shutter as states and localities increased restrictions on activities in order to prevent the spread of the virus. These closures then led to outrageous numbers of individuals becoming unemployed. Even though we are nearly one full year down the road from the start of the pandemic, unemployment figures are still grim.
For those predicting real estate market doom, swelling unemployment roles would be the next domino in the inevitable housing market crash. As millions of Americans lost their jobs, it was expected that they would in turn fall behind on their mortgage payments. Again, this part of the prediction also was not incorrect. Millions of Americans did fall behind on their mortgage payments. By the end of 2020, 3.4 million Americans were delinquent on their mortgage payments.
Those predicting a housing market crash anticipated that delinquency would turn into forbearance, which would then roll over into foreclosures on a massive scale. Mass foreclosures would then put a bunch of homes on the market, which would then cause housing prices to crash as inventory shot through the roof. At least that was expected by the dour prognosticators at the beginning of the pandemic. Afterall, it was a wave of foreclosures that brought the housing market to its knees in 2008. Thankfully, that did not happen. The wave of foreclosures never materialized and the real estate market did the exact opposite of what the naysayers predicted.
What Stopped the Pandemic from Crashing the Real Estate Market?
The pandemic never led to a repeat of the 2008 real estate market crash because lenders and governments learned from the Great Recession. They learned that allowing countless homes to be foreclosed on would mean disaster for homeowners across the board. Instead of allowing the wave of foreclosures to materialize, different actors from lenders to state governments, to the federal government stepped in and prevented it from happening. There were several steps taken that ultimately prevented runaway foreclosures and a real estate collapse.One of the first things that was done to prop up the market was that forbearance periods were extended.
Forbearance is a process that allows you to temporarily stop making mortgage payments in the event of financial hardship. Forbearance is not the same as forgiveness. Your mortgage payments are not forgiven. You still have to make up the payments that you miss. How you do that and when you do that is all determined by the forbearance agreement that you make with your lender. It is important to keep in mind that forbearance is not some willy nilly process where you just stop making payments. You have to actually reach out to your lender and make a formal agreement with them to put your loan in forbearance that lays out the terms of the forbearance. These agreements are also temporary, which means that if their term ends and you cannot pay back what you owe, then your house gets foreclosed on.
In order to stop the foreclosures dead in their tracks, lenders, state governments and the federal government extended the terms of mortgage forbearance agreements. In order to give everyone as much time as possible to wait out the economic hardships caused by the pandemic, forbearance terms were extended. Keep in mind, that lengthening the terms for forbearance is a stopgap measure. If the length of your forbearance is extended, but you still cannot pay when it is up, then foreclosure is the next step.
Governments then took additional actions beyond forbearance extensions in order to prevent a real estate market crash, such as imposing foreclosure moratoriums. In the event you fell behind on your mortgage payments, but were never able to recover during the time allotted by your forbearance, moratoriums protected you. Early in the pandemic, the federal government passed into law the CARES Act, which was a range of economic stimulus and protections designed to combat the pandemic. Included in the CARES Act was a provision that instituted a foreclosure moratorium. Many states and localities followed suit and passed their own foreclosure moratoriums, many of which lasted longer than the federal moratorium. As the pandemic continued, these moratoriums have been extended at all levels.
The final way in which governments stepped in to avoid a real estate market crash is through direct stimulus payments and increases in unemployment payments. The increases in unemployment payments have allowed millions of Americans who have lost their jobs to continue to pay their rents and mortgages. The direct stimulus payments helped those who were fortunate to keep their jobs to pay some of their bills and avoid falling behind on their home loans. As we have discussed, at least 3.5 million Americans still fell behind on their mortgages in 2020, so it is clear these measures were not perfect. However, without these different forms of economic support the results would have been far worse.
Good News for Foreclosures and the Real Estate Market
The good news for foreclosures and the overall real estate market is that the measures that have proven to prevent a market crash are being extended. Within the past week the Biden administration has taken a few steps that have already proven effective at preventing another 2008 situation and stopping foreclosures in their tracks. First, the extended windows for forbearances have been extended through June. At the same time, the federal mortgage foreclosure moratorium has also been extended through June. While these measures do not address the source of the problem, they do provide a stopgap that prevents the crisis from spiraling out of control.
There are other signs of good news that do more directly address the financial pain that many Americans are still feeling. The first is that economic stimulus payments are likely to be passed by congress in the near future. Again, this is not a panacea, but any help is better than no help. Second, and even more importantly, the main cause of market crash fears, the pandemic, seems to be entering a more controllable phase. The number of coronavirus cases and hospitalizations are declining dramatically. At the same time, the rate of vaccinations is increasing significantly.
These two pieces of good news are significant because it shows that there is light at the end of the tunnel. Getting the pandemic under control is the best thing that can happen to prevent a housing crash. Controlling this virus allows businesses to reopen, people to return to work, and families to make their mortgage payments. This would stop foreclosures in their tracks and would make sure that today’s red hot market would continue.
Final Thoughts
If you have been worried about a real estate crash because of the pandemic, you can probably stop worrying. The efforts to control the pandemic and the economic interventions designed to stop foreclosures means that collapse is not around the corner. In fact, it is more likely that the surging house prices are likely to continue. What this means is that if you have not taken advantage of today’s low mortgage rates and bought a home, you might want to do that soon. Housing prices should continue to increase, especially as the market improves. However, an improving economy also means that mortgage rates are likely to increase. So, if today’s rock bottom mortgage rates have had you thinking about buying a new home, do not delay. The time is now. Today’s deals will not last forever, so contact us and see how we can make your dream of owning a home a reality.
