While the housing market may be hot right now, some economists are warning against overestimating its strength or what the boom means for a broader economic recovery.
In fact, the market is starkly divided: on the one hand, some homeowners are unable to pay their mortgages; on the other, people are buying houses to support home offices and private yoga studios.
- Record low mortgage rates are fueling a boom in home sales and prices, making the U.S. housing market an apparent bright spot in a gloomy COVID-19 economy.
- The signals of strength in the housing market may be misleading, particularly because the pandemic economy is affecting people in vastly different ways.
- Serious mortgage delinquencies have risen for five straight months.
- Foreclosure rates, artificially low because of pandemic-related government protections, are expected to surge once those end.
- Unemployment and a tight credit market are preventing entry-level buyers from purchasing homes.
As record low mortgage rates help propel the volume of home sales past even pre-pandemic levels, the housing market appears to be a bright spot in the gloomy COVID-19 economy. Increasing demand—fueled by the shift to working from home—is driving up sale prices, and some current homeowners are even forgoing the option to renew forbearance plans on their mortgages in a sign of improving financial situations.
But then there are metrics forewarning a long road ahead and signaling much of the damage from the COVID-19 recession has been temporarily masked. The unemployment rate is still more than double what it was before the pandemic, mortgage delinquencies are well above normal, and foreclosures that have been suppressed by emergency forbearance relief measures threaten to flood the market once the reprieve ends. This would hurt both consumers and lenders.
“The way I’m thinking about it right now, there are multiple housing markets,” said Tendayi Kapfidze, chief economist at LendingTree, the mortgage marketplace. “Certain people are not as affected by the economic crisis.”
Indeed, those with means are snapping up the limited supply of homes for sale while the more vulnerable, if they own a home, continue to fall behind on their mortgages.
Payments on 3.68 million, or 6.88% of mortgages nationwide, were overdue at the end of August—less than the 7.76% (the peak) in May but still twice the share before the pandemic began, according to mortgage data company Black Knight. Worse, the number of loans seriously delinquent (90 days or more past due) rose for the fifth straight month, reaching 2.37 million—more than five times pre-pandemic levels.
The full impact of these delinquencies has yet to be felt, largely because of two federal COVID-19 relief measures applying to mortgages backed by the government. Under the CARES Act, passed in March, foreclosures are prohibited on these loans through the end of the year. Plus, people experiencing a financial hardship can suspend their payments for up to one year under a special forbearance option.
In fact, despite the magnitude of seriously delinquent loans, foreclosure filings fell 81% in the third quarter from a year earlier, reaching their lowest level since data company ATTOM Data Solutions (parent to RealtyTrac) began counting them in 2008. In September, there were only 9,707 U.S. properties with foreclosure filings.
“It’s important to remember that the numbers we’re seeing today are artificially low,” Rick Sharga, a RealtyTrac executive vice president, said in a report released Thursday. “We’ll see a significant—and probably quite sudden—burst of foreclosure activity once these various government programs expire.”
Based on the trends so far, Black Knight foresees delinquencies could remain above pre-pandemic levels until March 2022. In March 2021, when the first wave of forbearances expire, there will still be more than 1 million additional loans in delinquency because of the pandemic, the firm predicts. (If a mortgage in forbearance is past due, it’s still counted as a delinquency.)
“Many of the current mortgage delinquencies will end up in foreclosure actions when the moratorium is lifted,” Todd Teta, chief product and technology officer for ATTOM Data Solutions wrote in an email. It could “send a glut of empty homes into the market, threatening downward pressure on prices and the broader economic recovery.”
Harbinger for Economic Recovery?
While a strong housing market has traditionally been a harbinger of overall recovery from an economic downturn, this housing recovery is unusual, according to William Emmons, an economist at the Federal Reserve Bank of St. Louis.
Rather than broader underlying signs of health, this recovery may have been driven primarily by ultra attractive mortgage rates, he wrote in a recent report. Thirty-year fixed mortgage rates have now fallen to new record lows 10 times this year, dipping to an average 2.81% this week.
“Current circumstances are so unusual that a burst of housing strength alone may not predict broader trends,” Emmons wrote in the report. “Moreover, the housing market itself may not be as strong as a selective reading of recent data might suggest.”
For sure, some of the data indicates quite the housing boom. In August, there were an annualized 6 million sales of existing homes—the most for any month since 2006—after record monthly growth earlier in the summer. Sale prices are breaking records too, reaching medians of well over $300,000, depending on the data source. Even housing starts have largely recovered from the pandemic, rising 4.1% in August for single-family homes.
But other indicators, including the trends in delinquencies, paint a bleaker picture. In anticipation of covering losses from borrowers being unable to repay their loans, banks have sharply increased their loan-loss reserves, to 2.29% of loans held at the beginning of September from 1.21% of loans held at the end of March, Emmons said, citing data from the Federal Reserve Board.
This is “a credible signal of serious problems ahead for many borrowers,” Emmons wrote.
He also noted that 61% of all banks had tightened standards on new mortgage lending by the third quarter of 2020, which is likely to mean fewer loans being made in the future.
Then there are unemployment concerns. The unemployment rate was 7.9% in September, still more than twice the pre-pandemic rate, and there’s concern about how many temporary job losses will become permanent, LendingTree's Kapfidze said.
At the same time, even the headline metrics are beginning to show signs of a slow down. The 6 million home sales in August were just 2.4% more than in July, and CoreLogic, another real estate data company, predicts year-over-year growth in home prices will slow to a modest 0.2% by August 2021, from 5.4% this past August.
Two Housing Markets
One way to make sense of the two extremes in the housing market is to envision a “K-shaped” economic recovery in which the wealthy do better than ever and those who have been hit hard by the crisis suffer further setbacks, said Kapfidze.
Higher earners may have the ability to work from home, benefit from stock market gains, and use any stimulus payments or extra unemployment benefits provided by the federal government to buy or upgrade a house. Plus, anyone who already owns a home has one that’s probably worth more because of the pandemic.
Meanwhile, people with lower incomes often work in jobs where remote work isn’t possible, making them more apt to lose their jobs in the pandemic, more likely to miss mortgage payments, and more reliant on income and credit for buying power if they don’t own a home. The end of a $600 weekly unemployment supplement from the CARES Act—cut off at the end of July without a lasting replacement—hasn’t helped.
This dichotomy reveals itself in a variety of ways.
Home buyers, who must be willing to pay more because of record low inventories of properties for sale, are suddenly demanding houses with home offices, multifunction rooms, and yoga spaces, according to the latest survey by the American Institute of Architects. Interest in yoga spaces, nonexistent in its last survey, was at 23%, while the share of buyers who wanted home offices jumped from 29% to 68% since last year.
In addition, as the first wave of pandemic-related forbearance plans have ended (they last six months), many homeowners aren’t renewing them for another six months, despite having that option. The number of homeowners in active mortgage forbearance plans dropped 18% in the first week of October—the largest single-week decline since the pandemic began, according to Black Knight. And most homeowners coming out of forbearance are currently performing on their mortgages, the firm said earlier this month.
On the other hand, the full impact of delinquencies among more vulnerable homeowners has yet to materialize. And for entry-level buyers, unemployment, rising home prices and the tightening credit market are proving particularly troublesome, said George Ratiu, chief economist at Realtor.com.
"It comes down to ability to buy,” Ratiu said. “People's incomes are being outstripped by price appreciation."
As evidence of this disparity, the average mortgage applied for in the final week of September reached $371,500—the highest in at least 30 years, as demand for entry-level homes lagged demand for higher-tier homes, according to the Mortgage Bankers Association.
Cheryl Young, a senior economist at Zillow, calls it a “wedge” between those who are able to make a move and those who aren’t.
“If you have the means to do so, you can buy a house elsewhere, but if you don’t, you will likely have to stay in a rental unit or a smaller home for the foreseeable future,” she said.
For those who already own homes, at least higher prices increase the value of their existing investments, helping to reduce the risk of foreclosure. In the second quarter, the average homeowner had almost $125,000 in tappable equity in their home, a record high and about $3,200 more than they did a year earlier, Black Knight said.
Still, the threat of a wave of foreclosures looms large.
“These delinquencies are a big risk and will play out over a really long time,” Kapfidze said.