Are We In A Distressed Home Market?

On today’s show we’re talking about some leading indicators that might predict what will happen in the housing market 3-6 months from now.

As we all know, there is a moratorium on evictions and foreclosures in most areas right now. In the US, the moratorium on evictions was extended again until at least the end of August.

The big debate is whether we will face a period of real estate asset deflation before we experience large scale inflation. Let’s look at the drivers that might be affecting the real estate markets. The big question is what will happen in the credit markets.

We have a 13.3% unemployment rate in the US and 13.7 percent unemployment rate in Canada.  For now, unemployment benefits remain in place. But they won’t remain in place indefinitely. When they start to disappear we will start to see defaults in consumer credit, automotive credit, and eventually in mortgage credit.

But here is where the numbers get interesting. Only 15.9% of loans in forebearance made payments in June. That’s down from 28% in May and 46% in April. These forebearance agreements are finite in duration. The question is what happens six months from now.

More than 100 million auto loans and student loans have had missed payments since the start of the pandemic.

As of the end of May, 4.3M real estate loans were in default, and increase of 723,000 from the month before. More than 8% of US mortgages were past due or in foreclosure. That compares with a normal mortgage default rate of 0.42%.

There are now 4.3 million homeowners past due on their mortgages or in active foreclosure – including those in forbearance who have missed scheduled payments as part of their plans – up from 2 million at the end of March.

On a percentage basis, there are now 7.76% of homes in the US in a distressed situation. But the fact is, almost none of these are on the market, thanks to the moratorium on foreclosures.

As the amount of government bailout money dries up, the number of distressed homeowners will only increase.

Over the span of 5 years from 2008 to 2013, a total of 10 million people lost their homes in what was at the time the biggest distressed home market in history.

We have lots of people with traditionally good paying jobs that have experienced significant income disruption. We’re talking about airline pilots, dentists, dental hygienists, hotel staff, flight attendants, fire fighters, police officers, physiotherapists. The list goes on and on.

Airline pilots and flight attendants are obviously impacted by the pandemic. City employees like fire fighters and police officers is less obvious. The problem is that cities are forced to balance their budgets and most have experienced a 25% loss in revenue during the pandemic. As we reported last week, Nashville just passed a 34% property tax increase in order to try and make up the shortfall. Whether that truly solves their problem remains to be seen. Other cities have been forced to reduce staff significantly.

There are a few hotspots where the delinquency rate is much higher. Mississippi, Louisiana, New York, New Jersey, and Florida all have delinquency rates above 10.5%. Mississippi is close to 13% delinquency. You can expect that there will eventually be a sharp increase in distressed inventory working its way through the system.

At what point will the bailout money dry up? We are in an election year in the US and neither Republicans nor Democrats want to be seen as abandoning the population in a moment of need

While all the traditional real estate market indicators point to a strong real estate market in many cities including low inventory, low interest rates, rising prices, multiple offers. These conditions may be artificial and could be hiding a much different underlying condition.