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  • Evan Shweky, Esq.

Outlook for Residential Housing in 2021 - Why we say Positive!

PRICE STABILITY FOR THE RESIDENTIAL HOUSING SECTOR LOOKS PROMISING GOING INTO 2021 AND BEYOND

There seems to be substantial confusion surrounding the housing market’s resiliency in the face of COVID-19’s shock to our economic system. Many pundits anticipate a housing correction beginning in the second half of 2021, arguing that, as permanent job losses mount, and federal protections under the CARES Act expire, a considerable number of distressed properties will begin to flood the market. However, the current state of the national housing market, and an analysis of recent data points contradicts this gloomy forecast, and paints a more optimistic picture for the future trend of the residential housing sector.


Many of the prognosticators rely on the subprime mortgage crisis of 2007-2010 as the baseline for comparison with the financial havoc Covid-19 is inflicting on current homeowners. During the period of the previous financial crisis, home ownership was seen as an “inalienable right,” whether a prospective homebuyer could realistically afford a home or not. The combination of loosened mortgage lending credit standards with ample availability of credit led to a tsunami of residential mortgage defaults resulting in 4mm homes lost to foreclosures.


The causes of the mortgage meltdown of the Great Recession are dissimilar to the challenges facing the current housing market. The events surrounding the mortgage debacle were self-inflicted by mortgage lenders, financial institutions, real estate investors and homeowners themselves. A delayed response from Congress and the Federal Reserve in addressing that financial turmoil only deepened the crisis. Much of the housing market’s stability in the face of the headwinds of an international pandemic, lies in the protective mechanisms put in place by Congress and numerous regulatory agencies, as well as the precipitous lag in new housing construction during the last decade, despite a continuously growing population.


LESSONS LEARNED FROM THE SUBPRIME MORTGAGE CRISIS

All of the players from the last mortgage crisis have learned hard lessons and have since taken cautionary steps to avert a similar calamity going forward. Banks are now subject to more stringent capital and liquidity standards as a result of the Dodd-Frank Act of 2010. Leverage at financial institutions are low relative to historical standards. Banks have also narrowed underwriting standards on their mortgage loans to households. Unlike the previous financial crisis, Congress and the Fed jumped into action at the onset of the pandemic. As all economic activity came to a standstill, both government entities moved swiftly in implementing unprecedented stimulus aimed at supporting the economy. Congress passed the CARES Act while the Fed implemented numerous massive stimulative programs designed to keep liquidity flowing through financial markets. Federal Reserve Chairmen Jerome Powell’s pledge to keep short term interest rates near zero until 2023 further calmed financial markets. The adoption of conservative liquidity and lending standards combined with the current stimulus measures and pending government stimulus package (hopefully Congress can agree on a new package soon after the upcoming election), are largely responsible for the strength of the housing market during this bizarre period of economic uncertainty.


CURRENT DATA CONFIRMS THE STRENGTH OF THE HOUSING MARKET GOING INTO 2021 AND BEYOND


1. A Good Portion of Homeowners are Coming out of Forbearance and Remain in

Good Standing with Lenders

Current data bears out the prospect that the stimulus plan is working and the “foreclosure crisis” of 2021 should be nothing more than a bump in the road to an eventual full economic recovery. Data and analytics company, Black Knight, Inc.’s October 5, 2020 report noted that 2.4mm of the 6.1mm homeowners who opted for forbearance under the CARES Act have come out of forbearance, with the broad majority currently considered in good standing. That’s roughly a third of the 6.1 million homeowners who’ve been in forbearance at one time or another since the pandemic began. Furthermore, the report pointed out that American homeowners now have the most equity available to them in history. Of those in forbearance, just 9% have less than 10% equity in their homes.


2) The Inevitable Uptick in Foreclosure Activity in 2021 Should have a Negligible Impact on Housing Prices

The graph below depicts the anticipated number of properties that will land between initial-foreclosure-notice phase and final resale by lenders that have taken over properties by the spring of 2021. ATTOM Data Solutions collects information on the real estate and property market. It estimates that by the second quarter of 2021 the number of cases somewhere in the foreclosure process will more than double from 145,000 to 336,000 (with a significant portion of the increase likely to occur at the high-end market concentrated in the West). In a worst-case scenario, the estimate jumps to 505,000, a situation that would likely play out if Congress does not continue its moratorium on most residential foreclosures or if the government stops subsidizing homeowners who have fallen behind on mortgages. Assuming the worst-case scenario above, the number of annual filings is well within the median average of annual foreclosures filed post financial crisis. Taken from historical perspective, this dramatic increase pales in comparison to the close to 4mm bank owned properties amassed between 2007-2010.


3) Homeowners have Substantially Greater Equity in their Residence in Comparison to 2007-2010

According to the Federal Reserve, owners’ equity in real estate as a percentage of household real estate (value of real estate households own less any outstanding mortgage debt) was almost 66% at the end of 2Q 20 which is in line with the historical overall average (excluding the Great Recession and a few years before and after 2007-2010). Between 2009 and 2012 the equity percentage hovered in the neighborhood of 46% (see chart below). Additionally, CoreLogic reported that only 3.2% of all mortgaged properties (approximately 1.7mm homes) had negative equity through 2Q of 2020. To put this in perspective, in 2009 when the equity picture for homeowners was bleakest, 1 in 4 properties had negative equity.

While some homeowners may not have cash available to keep up with monthly mortgage payments, the strengthened equity position will incentivize them to actively sell their property to avoid the long-term negative impact a foreclosure would have on their credit. One solution that wasn’t available during the last financial crisis is to sell the home to an institutional landlord. Companies that evolved from the last crisis like Invitation Homes and American Homes 4 Rent offer escape routes for the cash strapped mortgagors. Between 2011 and 2017 investors poured over $36 billion on more than 200,000 homes across the country. These companies have a war chest of cash ready to go to work. Current homeowners will have the opportunity to sell their homes to these mega landlords without ever moving. Rather, they can seamlessly transition from homeowner to renter. With a limited housing inventory, distressed homeowners may not lose any equity with a sale of the property, because of the robust demand for housing.

4) Unprecedented Shortage of Housing Stock

As there is currently a dearth of homes for sale, the estimated addition of distressed properties to the housing supply beginning in the latter half of 2021 will in all probability, have a negligible effect on housing prices. In September 2020, national housing market inventory declined 39.0% year-over-year, and the count of newly listed properties for sale in September also decreased by 13.8% since last year. Currently, there is a 3-month supply of unsold inventory, well below the national median average of 6 months. Housing inventory in early 2009 was 11 months. Even if today’s rate of foreclosures doubled in the next year, the housing stock will remain more in line with a historically normalized range.


The creation of 23mm new jobs since 2010, low interest rates, millennials entering the marketplace and homebuilders’ inability to keep up with demand contributed to the paltry housing stock.


The lack of new housing has not been discussed as much as the other factor mentioned above. During the Great Recession, single-family housing starts plummeted by 80%. Homebuilders have yet to recover from the fallout of the financial crisis. Almost 50% of homebuilders went out of business and more than 200,000 construction jobs have yet to be filled to match pre-2006 employment levels. A more stringent regulatory environment, increased land and material costs and the lack of qualified laborers has made it difficult for homebuilders to keep up with consumer demand for housing. The chart below highlights population-adjusted single-family starts averaged over each decade. Economists at the National Association of Home Builders contend that the 10 years of cumulative underbuilding translates into a shortage of 5 to 6 million homes.

In Conclusion:

It should be noted that the conclusions reached in this analysis are based on a review of national statistics. The reality of the market in your area may not reflect the national trends. One need look no further than the New York borough of Manhattan where condominium prices in August were down 20% year over year. In San Francisco, price appreciation has far outpaced the national average for the past decade. However, prices for certain segments of the condominium market have fallen precipitously year over year with a current 12 to 14-month backlog of inventory. Unlike the rest of the country, sellers in the Bay Area are competing for buyers.


The coronavirus was a true black swan event of 2020. The resulting damage to the economy is unprecedented in both its swiftness and depth of destruction to the financial well-being of millions of Americans. The housing sector was on strong footing prior to the onset of the pandemic. Home prices will likely flatten or dip slightly until murky economic waters clear up, However, stricter mortgage underwriting standards adopted post-recession, early federal government intervention, substantial homeowner equity, the Fed’s pledge of low interest rates for years and the limited housing stock will limit any downside risks to housing prices nationally. While no one has a crystal ball, approval of a vaccine ready for widespread public distribution by early summer, appears to be a realistic time table. This bodes well for a quicker economic recovery that will continue to support home prices at current levels, if not higher.

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Delarosa Asset Management LLC / T 646.596.5258 / info@delarosallc.com 

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