Mixed Messages About Foreclosures
Many feared that the COVID pandemic would crash the housing market. The logic was fairly straightforward. Experts feared the pandemic would lead to a tidal wave of unemployment. In turn, homeowners would fall behind on their mortgage payments, which would ultimately result in a flood of foreclosures. The housing market is based on supply and demand. The big fear is that demand for buying homes would disappear as Americans made less and the supply would skyrocket because of foreclosures. This would have been a recipe for disaster. Thankfully, this did not happen. Instead, demand skyrocketed because of historically low mortgage rates and the supply of homes crashed to historic lows. As a result, home prices reached an all-time high. This red hot real estate market has benefited millions of homeowners. However, mixed messages regarding possible foreclosures means it’s time to see what the data says about what’s over the horizon.
Why the Foreclosure Flood Did Not Happen
Before we look at today’s data, it is important to get some context as to why the feared flood of foreclosures never materialized. Some of the predictions of the doomsayers did become reality. As a result of the pandemic, the United States saw record numbers of unemployment. Just as many feared, this caused millions of Americans to fall behind on their mortgages. However, this did not cause a tidal wave of foreclosures. So, what happened?
While a wave of foreclosures did not materialize, a spike in foreclosures is probably a given. However, this will not result in a housing market crash like we did during the Great Recession of 2008. There are some big differences between today and 2008. First, homeowners have a lot more equity than they did in 2008. As prices have been increasing, so has home equity. This means that even if home values decline because of more supply, homeowners will still not be underwater on their mortgages. High levels of equity provides a safety net for home value fluctuations.
Second, the government had a number of massive interventions to prevent a foreclosure crisis. The federal government issued a foreclosure moratorium, as well as extended forbearance windows. At the same time, they increased unemployment benefits and provided multiple rounds of direct stimulus payments. So, even as millions of Americans fell behind on mortgage payments, the government provided a stopgap to prevent foreclosure. The unemployment benefits and direct stimulus checks then helped those who fell behind on payments to catch up. The government saw what happened to the global economy after the housing market crashed in 2008. This time around, they seem to be doing everything in their power to prevent it from happening again.
Mixed Messages About Future Foreclosures
While the efforts to stave off a housing market crash have been successful up to this point, there are some mixed messages about whether or not it is still a possibility. A few days ago the Consumer Financial Protection Bureau (CFPB) warned lenders about an impending wave of foreclosures. Their logic is that many Americans are still behind on their mortgages and foreclosure moratoriums and forbearance extensions end in the fall. At first glance, this might seem like bad news for homeowners and housing market watchers. However, digging deeper into this warning by the CFPB paints a rosier picture and demonstrates that a market crash is not around the corner.
If you read the CFPB warning closely, it is telling lenders that they need to be aware of a wave of “avoidable foreclosures”. This phrasing is important. The CFPB is not saying that a surge in foreclosures is inevitable. What they are saying is that a surge of foreclosures is entirely avoidable, as long as lenders take important steps. This warning is not an indication that the sky is falling in the real estate market. Instead, it is a kick in the pants to mortgage lenders to not be complacent and to be proactive to avoid a market crash. They are encouraging lenders to contact clients in forbearance now and come up with alternative arrangements in order to avoid foreclosures. This is an example of foresight and consciousness, that if acted upon, can prevent everyone’s real estate nightmare from becoming a reality.
Positive News Regarding Future Foreclosures
Even aside from reading between the lines of the CFPB warning to lenders, there is positive data that indicates a foreclosure crisis is not waiting over the horizon. After their warning, the CFPB took additional steps to prevent foreclosures. They are considering establishing a review board for all mortgages in forbearance that would prevent immediate foreclosures. At the end of the forbearance window in the fall, even if a homeowner was not in a position to catch up, they would then go to the review board. This review board would then determine whether or not a foreclosure can proceed. Even in worst case scenarios, foreclosures will not happen until 2022. At the same time, many foreclosures would not be allowed to happen for some homeowners. This is another way to buy some time for the Americans who have fallen behind on mortgage payments.
Furthermore, there is positive data that suggests many Americans are catching up on their mortgage payments. Forbearance numbers have been on the decline and have just dropped below the 5% mark. This is fantastic news because the number of mortgages in forbearance is an indicator of potential future foreclosures. Additionally, there is positive data that indicates many Americans will be able to catch up on their mortgage payments in the future. This positive data is the jobs numbers. The jobs report from March just came in and it blew expectations out of the water. The unemployment rate declined to 6% and over 916,000 were added to nonfarm payrolls. As vaccinations increase and cities open up, businesses are feeling more and more comfortable about the future. As such, they are hiring more people. This means forbearance numbers should continue to decline as more Americnas go back to work.
Final Thoughts
It can be easy to become paranoid about the state of the housing market when you read headlines about the CFPB warning about foreclosures. However, the available data and the meat of their message paints a rosier picture than you would ever imagine. While it is impossible to predict what the future holds, a crashing housing market does not seem imminent. As rates remain low and Americans go back to work, the demand from home buyers should stay very high. At the same time, without a flood of foreclosures on the horizon, the supply of homes should still be low. As a result, the recipe for a red hot market and rising home values that has been in place all last year seems like it will stay in place for the near future. This means that homeowners and home buyers can breathe a sigh of relief.
