During the height of the COVID19 crisis last year, the government passed legislation designed to assist homeowners that were experiencing financial difficulties caused by the pandemic and subsequent business-related shutdowns. One of the most helpful pieces of legislation was mortgage forbearance, which gave many struggling homeowners the ability to delay one of their largest bills – the home mortgage – for a limited period of time.
Forbearance Has Been a Great Help to Many Struggling Homeowners
Over the next few months, this assistance may be coming to an end. As reported in the Wall Street Journal, “More than half of 2.7 million active forbearance plans are set to end for good in March, April, May or June, according to mortgage-data firm Black Knight Inc.” There is no question that the new administration will be looking to extend some, if not all, of these protections for homeowners. While this may get a lot of airtime in the news over the coming months, we have no expectation that the residential real estate market will come under pressure because of it.
Forbearance guidelines were put in place in order to encourage lenders to work with struggling borrowers, rather than force them to default on home loans. The fear is that once these guidelines expire, a wave of struggling homeowners could default on their mortgages. This, in turn, could cause another crisis in the residential real estate market, just like the one we experienced in 2008/2009. That is the fear. However, we do not believe that this fear is warranted.
The Financial Crisis of 2008/2009 Was Caused by a Real Estate Bubble
As reported in the article: “there is a significant difference compared with the 2007-2009 recession. Back then, lenders foreclosed on millions of borrowers, many of whom owed more than their homes were worth because of plummeting home prices.1” During that crisis, prices for housing crashed throughout the country. Everyone was affected, regardless of the geography, category or income level.
The crash in real estate prices left millions of homeowners ‘underwater’ with respect to the value of their homes. This caused many homeowners to simply walk away from their homes. In many cases, homeowners were still able to work and pay their mortgage. However, the value of their home was so low that continuing payments on the mortgage no longer made economic sense. The overwhelming number of mortgage defaults triggered losses on bank balance sheet globally. This pushed prices down further.
None of These Conditions Exist in Today’s Residential Real Estate Market
In fact, today, residential real estate markets across the country are experiencing unprecedented demand and soaring prices. Residential real estate is in high demand. The residential housing market is still experiencing an historical shortage of new-construction homes for sale. The demand for new homes continues to be high and the supply of new-construction housing is at an historical low, meaning more buyers will continue to be pushed into the market for existing homes. (Almost a Year Later, Demand for Fix and Flip Still Strong).
All of this is positive news for struggling homeowners and for the overall health of the residential real estate market. In this market, most struggling homeowners have the ability to sell their home into a strong market – and do so at a profit. While this is still not an ideal situation, it is a far stronger position to be in than during the real estate crisis of 2008/2009.
Positive News for Individual Homeowners and the Entire Residential Market
For the overall market, there is no reason to fear a flood of bankruptcies and foreclosures all hitting the market at once, crashing home prices nationally. There is too much demand support in the market, and too much legislative momentum to leave struggling homeowners stranded, as happened in 2008/2009. While news of the forbearance legislation expiring may make splashy headlines in the news over the coming months, we fully expect the residential real estate market to remain strong for the foreseeable future.
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Steve Sapourn is co-founder and portfolio manager at Aloha Capital. He specializes in designing low-risk portfolios that reliably out-perform benchmarks. Steve has managed alternative investments in a variety of asset classes for nearly 25 years. His accomplishments include creating and implementing quantitative trading strategies in the futures, stock, and volatility markets. He’s also served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies.