It seems every day we are bombarded with competing information about the state of the housing market. Just this week we learned that the economy gained back a large portion of the GDP lost during the spring COVID-19 shut-downs.
Housing sales are back up, with a summer/fall sales increase replacing what normally occurs in the spring, and demand continues to press against low-inventory driving up home pricing.
On the flip side, distress for many homeowners is looming. As the Mortgage Bankers Association has reported, 90 day delinquency rates are at their highest level since the third quarter of 2010. And as reported by the American Enterprise Institute (AEI), 10 large metropolitan areas (3 of which are in Texas!) are in serious risk of major FHA defaults with current 90 day delinquency rates exceeding 15%.
AEI even reports that many FHA-heavy zip codes are likely to see a dramatic shift in the housing market. “At some point, a significant percentage of the then delinquent loans would be expected to be placed on the market by owners under distressed conditions or become foreclosures, and then enter the market. It is at that point we would expect buyer’s markets to develop in zip codes with heavy exposure to FHA and other high risk lending combined with high levels of delinquency.”
So why then does this not feel like the calamity of 2008? The answers are pretty simple. While distress is beginning to, and will continue to hit the housing market, overall we are not likely to shift to a buyer’s market. The reasons for this are many.
- The recession of 2008 was caused by a housing bubble, created by excessive lending to risky borrowers. Here we see the reverse; an economic recession that is the cause of housing distress. With a lack of a lending “bubble” that distress is going to be more targeted at those most effected by the recession.
- Demand will remain high pushed by changing demographics, mostly the emergence of millennials as the largest generation of home buyers in history.
- The prolonged seller’s market since roughly 2014 has significantly increased equity giving homeowners more options.
This is not to say distress is not here and getting worse. It is. And it will get much worse before it gets better. Core Logic predicts a 4-fold increase in distress among homeowners by 2022 over 2019 levels. But investors and realtors (and in particular investor-realtors) need to be prepared for a much different rate and response to that distress than we experienced in 2008-2011.
The high-equity and less-risky loans means that foreclosures themselves are not likely to increase at the same rate as distress because homeowners will have other options. In fact, we are likely to only see about a 70% increase in the number of foreclosures despite a 400% increase in the amount of distress.
The distress, in fact, is most heavily targeting working-class neighborhoods as service-industry and lower-wage earners were most impacted by the decreased economic activity related to COVID-19.
So as investor-agents, we have to have strategies that are going to be different than in 2008. While there will be an increase in the number of short-sales, the equity position of most homeowners means that a traditional listing is more likely if the homeowner still has a lot of time.
But that also means that Sub2 and wrap opportunities are going to be plentiful as homeowners will have equity, but still have the stress and pain of falling behind on payments.
In my opinion, that uniquely positions StepStone Realty as the right brokerage at the right time. If you are an investor, a license is going to be a critical tool in monetizing more of the leads where foreclosure is not the end-game of distress.
And if you are a Realtor, understanding and knowing your creative options will allow you to find more opportunity to help homeowners overcome the challenges of this new economy.