One of the most significant positive developments for the US economy this year has been the strength in the residential real estate market. This has come as a major surprise since 2020 experienced both the highest unemployment rate and the highest number of unemployed Americans since the Great Depression, and greater numbers than during the housing crisis of 2008/2009. With such dismal unemployment statistics, it is natural for investors to worry about the size and scope of potential mortgage delinquencies.
Given those concerns, it has been another positive development for the market to see that the number of homeowners facing serious challenges and mortgage delinquency dropped again. As recently reported by CoreLogic in its latest Loan Performance Insights report, “The U.S. serious delinquency rate took another step forward in May, dropping to its lowest level since last June. Approximately 3.2% of all loans were seriously delinquent, at least 90 days past due, according to CoreLogic’s data. While still high, the share of serious delinquencies has continued a pattern of improvement and is down substantially from its pandemic-era peak of 4.3% in August 2020.”
Still etched in the minds of investors are the challenges faced by the residential housing market during the 2008/2009 housing crisis. Given the large numbers of unemployed due to the COVID business shutdowns, many investors openly questioned if we were destined for a repeat of the housing crisis. It certainly would not have been out of the question to expect similar challenges to housing following the pandemic. However, the exact opposite has occurred. The supply of new and used homes for sale and rent remains near historical lows. The demand for single-family homes is soaring, and so is the value of those homes.
While the economic pain of both crises may have felt similar, the resulting economic climate could not be more different. Unlike the aftermath of the 08/09 housing crisis, homeowners today are experiencing significant increases in the value of their homes and have record levels of equity available from those rising values. As detailed in the article, “The rise in home prices has built a substantial home equity cushion for homeowners with a mortgage, reducing the risk of a foreclosure,” said Frank Nothaft, chief economist at CoreLogic. The CoreLogic Home Price Index recorded an annual increase of 17% in June. This price rise builds home equity. For most borrowers in forbearance, the equity gain means they’ll still have some remaining — even if missed payments are added to their loan balance.”
Credit for this positive development is shared by a few significant developments. These include a strong and rapid rebound in overall economic activity, red-hot demand for existing housing stock, and yes, even the government. Unlike the housing crisis of 08/09, during this crisis, government moved much quicker to implement programs offering a safety net to struggling homeowners. From the article, “Due to those significant equity gains coupled with the prevalent availability of both government assistance and loan modifications, CoreLogic expects that most borrowers with delinquent mortgages have access to enough support to fend off a foreclosure crisis, even after the expiry of federal anti-foreclosure measures.”
In many ways, the run up in home values over the past several years has been reminiscent of a similar run up in home prices prior to the 2008/2009 housing crisis. Many real estate investors and pundits have questioned if this current red-hot housing market will end in a similar fashion. Like many things with the markets, no one can know for sure.
However, as we have discussed at length in past posts, this particular market is being driven by vastly different fundamentals. The historic shortage of homes for sale currently being experienced will take years to satisfy, which will be a strong driver of home values for some time to come. As supported by evidence in this recent report, homeowners today are in a far better position with significantly more equity in their homes. All of these factors combined point to a residential real estate market with strong fundamentals going forward.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.