When the shutdowns from the pandemic rippled through the economy, I saw statistics that up to a third of all mortgages could end in default. At the same time, home sales of previously owned homes just dropped to a 10 year low. What is going on in the housing market? Is this the calm before the storm or the dawn of a new era?
What was in the data?
- Defaults/Foreclosures haven’t materialized: To be honest, I was blown away that we haven’t seen more defaults in the market. I was bracing for substantial pain in the market after watching the lockdowns persist for three months. Fortunately the federal government made some key decisions that “delayed” the pain in housing. First, they gave additional unemployment money to help displaced workers. Second, they implemented the paycheck protection plan to pay small businesses to retain their staff. Finally, they implemented policies to allow borrowers to defer payments up to a year on federally backed mortgages. All three steps led to the market holding up considerably well.
- Home sales of previously owned homes plummets to 10 year low: At the same time the federal government has worked to inject cash, the number of sales of previously owned homes has plummeted. The primary driver of the large drop in sales is due to lack of inventory. As soon as the pandemic struck, builders and banks pulled back on new construction while at the same time many prospective sellers decided to stay put due to economic uncertainty.
What does the rest of 2020 look like?
Ironically, even though much of the economy is in the tank, real estate has held up well and will continue to hold up better than the rest of the economy through the remainder of 2020. Inventory is still very limited and aggressive federal policies have pumped billions into the economy to keep many borrowers afloat.
What happens in 2021?
Unfortunately, all parties must eventually end. At some point companies will need to drastically resize due to the changing demand. Think of airlines for example, United Airlines predicted that they will need to reduce staff by around 50-60%, but due to their government bailout they are unable to fire anyone until October. You will see after the holiday season big layoffs in the travel industry that will ripple through the economy. This is not unique to the travel industry as hospitality, clothing companies, big box retail, etc… will all go through a transformation which will lead to large scale displacement of workers.
Furthermore, the piper will need to be paid! The government can’t print money forever! 10.7 million borrowers think that they will not be able to make next months payment. Almost 9% of all mortgages are in forbearance and an alarming trend is starting to emerge. In April, 46% of borrowers in forbearance still paid their mortgage. By the end of May, that had fallen to 28%, and by June 15, just 15% of borrowers had made their payment for this month, according to Black Knight. This points to rocky waters ahead.
Summary
The economy is still in the “party” stage where the couple glasses of alcohol feel good. Unfortunately, eventually you have to wake up the next morning. Will this party end with a mild hangover or more severe side effects? The jury is still out on how the party ultimately ends, but it is becoming increasingly clear that 2021 will the year of reckoning.
