Wolf Richter points out that COVID-19-related, legally enforced forbearance on rent payments and mortgage loan repayments has created a hangover of properties that are far in arrears on what's owed. Those forbearance measures can't continue forever. When they end, those mortgage defaults may trigger a massive wave of sell-offs in parts of the housing market, which might dramatically reduce property prices and values.
On the other side of the red-hot housing market, a historic delinquency problem has been fermenting since last spring, largely put on ice and on hold by forbearance programs, waiting to be dealt with. The Federal Housing Administration (FHA) which insures nearly 8 million high-risk mortgages, reported that the delinquency rate of its mortgages rose to 17.5% in February, up from 17.0% in January, matching the all-time records of September and November last year, according to the AEI’s Housing Center.
. . .
Rumors of perma-forbearance are now floating around, given the multiple extensions of the forbearance programs that no one has any political appetite to let expire. But those are just rumors. Eventually, those programs will end, and then the delinquent mortgages will have to be dealt with.
Borrowers who can do so will resume making payments, either with the missed principal and interest added to the end of the mortgage, or with the lender agreeing to modify the mortgage ... Borrowers who cannot or don’t want to make mortgage payments can sell the home and use the proceeds to pay off the mortgage, including the missed interest payments. If the borrower fails to sell the home and pay off the mortgage, the lender can foreclose and sell the home. In either case, those homes are going to show up on the market.
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But in markets with a large concentration of delinquent FHA mortgages, this would unleash a flood of homes coming on the market – and it would instantly cure, and more than cure, the inventory shortage now being lamented, and when large enough, the sudden supply of homes for sale would send bigger ripple effects through the market.
That’s why no one is eager to let the forbearance programs expire, and why it’s so hard to get out of this extend-and-pretend phase.
The AEI Housing Center identified 10 metros that are most at risk of this sudden supply of homes, with delinquent FHA mortgages showing up on the market ... For example, in the Houston metro (#2), 48,483 FHA mortgages are delinquent, or 22.5% of all FHA mortgages in the market. Of them, 32,224 mortgages are “seriously delinquent.” This creates the potential that tens of thousands of homes flood the market over a relatively short period of time.
And those delinquent mortgages are just FHA-insured mortgages and do not include other delinquent mortgages.
There's more at the link.
If you're a prospective seller at the moment, this implies you should sell your property quickly, before a wave of "default selling" hits the market. On the other hand, if you're a buyer, you might do better to wait, in the expectation that housing prices will decrease under the impact of forced sales.
If there is a wave of forced selling, I expect major investment firms to take advantage of it to increase their property holdings, as happened after the last housing crisis. That doesn't bode well for private home ownership, as such firms don't want families to own their own homes. They want families to rent from them instead, giving them a permanent income stream with less risk than investing in stocks and bonds.
Fortunately, I'm not planning to buy or sell property in the near future, so I can sit back and observe. Sadly, there are some who don't have that luxury.
Peter
9 comments:
I'd be interested to hear more about how this wave of payment issues is going to interact with the wave of buying we are seeing from low interest rates. As you say, the smart ones are going to cash out now before prices change or repayment changes.
I'm surprised that the FHA ONLY has 8 million mortgages on it's books; I would have expected it to have many more.
In the case of large cities, such as Houston, I wouldn't be worried about the impact of that many delinquent mortgages on a city or regional basis. IF all of them default, THEN it will take years to work though the system and come onto the market (look at the multiple years it took the foreclosures of 2008/2009 to work through the system). In addition, Houston has over a million homes; this is at most (assuming they all default) a couple percent of the market.
However, I suspect these homes are concentrated in certain areas of the city,many of which are already dealing with crime, gangs, and other issues - if you live in one of those areas, then it is time to be worried for your neighborhood or your part of the city...
I suspect that most of the at rick mortgages are in or near major cities but haven't seen that confirmed.
Neighbor's house just sold for $42,000 above the asking price in about one day. This will further the difference between the haves and have nots. Very few people starting out could come up with 42K as a down payment. Especially the ones paying off their college loans -- forever. I believe big changes are coming, and it is concerning to say the least. My first mortgage was at 10.75 percent, but you could reliably get 7 percent on your savings. Mortgage rates are low currently, but what do you get on your passbook savings, 1 percent if you are lucky. The ratios are skewed now in favor of the banks and at an unprecedented margin.
Another thing on the horizon that will trigger home sales and/or foreclosures in suburbs and rural areas, is rising gas prices. Those who are stretched to their limit on payments will find that they can no longer afford the home in the suburb, or rural area, if they commute into the metro area for work, once gas prices approach $4 per gallon. Same thing happened during the Obama administration.
I'm watching this closely, knowing we may have to move in the near future. But our plan is to rent for a while, and figure out what and where to buy... so that means we should get this place sold ASAP while the market is hot for houses. Sigh. Decisions!
I bought recently. I had planned to wait for a dip but life threw me a curve ball and I needed to move. However buying a (relatively as I’m on the upper left coast where it’s al crazy) affordable house is generally a good investment.
I don’t think prices will drop until money gets more expensive. Most folks are getting a loan so the payment matters more than the overall price. When folks can borrow for a house at 2.5-3% the extra money doesn’t add up to much. The difference between a 250k house and a 300k house payment isn’t huge.
When rates start to rise it will cool the market. In some places it’s so crazy that even if it cools substantially prices won’t drop, they will just rise less.
Unfortunately, the housing bubble will be only a part of the Everything Bubble. If I understand it correctly-
The rise in interest rates MUST be stopped because the government can't afford the interest on the Trillions of dollars of debt if rates go up to 5%. To hold down interest rates, the Fed must "print" much more currency. This stops interest rates from rising because bonds will increase in price, lowering their yields, but prices will rise due to the inflation of the currency supply. Why ? Because more currency chasing the same amount of goods and services. They told you that in school. At least they told me. A higher minimum wage will put low-skilled and young people out of work. Shutting down oil drilling and stopping work on the pipelines will also put people out of work. And raise gasoline and diesel prices. Which makes consumer goods more expensive. Shutting down the coal mines will put people out of work. And the new socialist administration wants much higher taxes. Because "fairness". Also millions of illegal aliens will be welcomed in as new legal citizens. Some of them will want jobs. When 20 to 30 million Americans are already out of work. The rest of them will be wanting welfare, free housing, free education, free medical care, and food stamps. And don't forget Covid- the Chinese Crud which can be released into the population whenever the Boogeyman needs a crisis. Want an experimental vaccine? You can be the lab rat. The Pharma giants who made them have no legal liability even if you die from it.
One more thing- the federal government is no longer elected by you and me. As affirmed by the "supreme" court. And therefore not subject to the will of the mere subjects- formerly citizens. It is free to do as it wants without the interference from bossy voters who want to be "represented".
Yes, we have a very exciting future coming at us quicker than you think. Good luck.
Today is the one year anniversary of the closing on the home we currently live in. We bought just as the Covid shutdowns were starting and we were more than a little freaked out because we had no idea what we were getting into. Turns out we couldn’t have timed it better. We bought the current house $150k below it’s current estimated value and sold our last home in one weekend for $30k over asking- a year ago! We got so so lucky,
But I do agree with Dogsledder’s concerns- all of them. We may have personally gotten lucky but the country is going down a very bad path.
@SQT- "You done good, son"- to quote an old western. Most of the country will be flat broke soon- my opinion- when the dollar tanks. My opinion- when the dollar collapses along with every fiat currency, everything denominated in any fiat currency- dollars, pounds, yen, lira, yuan, francs, etc. will collapse in value as well. Every contract, stock, bond, equity, certificate of deposit, etc. will be crushed by the falling value of paper. They are all just IOUs. Every one of them is subject to default. The only people standing will be those with their wealth in tangible things like homes, land, food, and precious metals. A few people will survive financially and a few will get rich but the masses will be flat broke and hungry. My opinion. Sorry to be so gloom and doomy but it is happening and soon.
Just went to contract on our house yesterday. We were on the market for seven months. We're taking a 100k haircut (we're still making a profit, but not as much). My neighbor across the street took a 180k haircut, desperate to get out of NYC (Staten Island, NY here).
He screwed everyone else on the block in the process.
Prices here dropped rapidly within the last two months, despite easy credit and low rates, because there were at least 12 homes in foreclosure within a 10 block radius. The median income in this neighborhood is 90k, or was, before COVID.
Fortunately, when this is over, we'll be 100% debt-free (no more mortgage!) and downsized into an apartment (no more property taxes!), assuming we can find one since no one can get evicted due to COVID, either.
The Overlord
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