Real Estate Market Disequilibrium
As of June 26th, 2021 the 2 year trend for medium single family home sales is +20% while total listings is -57%.1 This has given the false impression that we are in a red hot market driven by considerably high demand with a consistent supply of salable housing. The issue is, the total supply has been suppressed by the FHA Foreclosure Moratorium affording Federal Mortgage holders the opportunity for 18 months of payment forbearance on their home loans without the hassle of proving financial need. This has given many home owners a better opportunity than listing their homes during the forbearance period.
Lifting Moratoriums
As of July 31st, both the FHA Foreclosure & CDC Eviction Moratoriums will be lifted nationwide; a major step in the direction to remove COVID related social safety nets. This opens up tough decisions for many home owners that will be required to pay their mortgages once again. Furthermore, the skipped months will need to be paid back including all accrued interest within the time frame. The FHA gives home owners three options of payment, lump sum up front, 6-12 month repayment plans on top of current monthlies, or lump sum as last payment of the mortgage. These options do not give in crisis home owners the confidence to continue paying on their current mortgages.2
Above is the current Census Bureau survey of % of adults living in households not current on rent or mortgage where eviction or foreclosure in the next two months is either very likely or somewhat likely.3 (Total USA was 31%)
Un-tightening the Belt
To understand the market supply situation in the United State we have to look back at pre-Covid numbers. From 2017 through 2019 the nationwide average monthly count for active Single Home and Condo/Townhome listings was 1.3M units, as of June 2021 there were currently 550K active listings, only 42% of the 3 year average.4 Now, as we look to the future and consider the lifting moratoriums, we will obviously see a progressive reversal in the supply. Unfortunately, there are currently 1.5M US homeowners that are seriously delinquent (at least 90 Days) and at risk of losing (or selling their homes).5 Best case scenario is that many of these homeowners have the opportunity for sale instead of foreclosure due to the forbearance framework established in the moratorium. However, this still means that a considerable volume of listings will flood the market, possibly pushing total count +50% vs. the‘17-’19 monthly average, in essence bottoming it out.
What to Expect Next
As the moratoriums are lifted, mortgage forbearance will be accepted through September 30th, 2021 so we should not experience an immediate, spectacular correction. What we should experience however, is a considerable volume of listings begin to hit the market within the next few months, pushing home prices down to levels that will begin a (slight) panic across investment sectors. If the listings are gradual enough, and foreclosures minimal, there should be a (modest) correction around Q4’21-Q1’22 that will serve itself a strong foundation for Q2 stability in the housing market.
Echo Effect and Inflation
They call it the dismal science for a reason. Unfortunately, no financial event exists in a vacuum. What we have yet to consider is our current inflation rate, propped up in part by stimulus and social safety nets. At 5.4%, the consumer in large part relies on the money saved while payments are skipped, both in rental and mortgage. Once this monetary opportunity runs dry, we will soon see large scale disruptions in human welfare and purchasing power. We need to be very aware of upcoming swings in consumer confidence and m2 (money supply available for spending). If we begin to see dips in either benchmark, we could experience strong, longer lasting effects in the financial markets.