Looming Foreclosure Crisis Unlikely to End Housing Boom: Experts

A house's real estate for sale sign is seen in front of a home in Arlington, Va., on Nov. 19, 2020. (SAUL LOEB/AFP via Getty Images)

WASHINGTON—U.S. housing prices are going through the roof, and a looming wave of foreclosures is unlikely to reverse this trend in the near term due to a severe housing shortage in the country, according to experts.

The foreclosure moratorium for federally backed mortgages is going to end on July 31. The Biden administration extended the national moratorium by a month in June and made clear that this would be “the final extension.”

Some were predicting that there could be a flood of foreclosures once the forbearance program expires, leading to a replay of the housing market crash of 2008.

According to the National Association of Realtors (NAR), as of June, there were roughly 2.7 million homeowners who hadn’t caught up on their mortgage payments and 1.8 million loans that were in serious delinquency, meaning 90 days or more past due and in foreclosure.

However, a majority of homeowners in forbearance (77 percent) have workout options and only a small fraction could end up selling their homes, according to Gay Cororaton, senior economist and research director at the NAR. Thus, she predicts that the impact of foreclosures on supply and housing prices is likely to be minimal.

Based on the Mortgage Bankers Association data from September 2020 through June 13, Cororaton predicts that only about one in 10 homeowners could opt to exit forbearance by selling their home (7.5 percent) or by a short sale or deed-in-lieu (2 percent).

That means nearly 180,000 foreclosed homes could soon hit the market, she told The Epoch Times. While these homes will add some relief to the tight supply of houses on the market, they won’t cause a glut that could slow or reverse the housing boom.

“The house shortage is much more severe; we are underbuilt by about 5.5 million homes,” Cororaton said. “Even if they sell these homes, you will not see a fall in prices, just because of the significant undersupply and tight inventory for homes.”

However, there are likely to be serious challenges facing low-income homeowners as they’re most at risk of foreclosure, according to NAR. This looming risk is expected to further widen the homeownership gap among income and racial groups.

Foreclosure and eviction protections introduced with the CARES Act last year have provided some relief for millions of Americans during the pandemic.

The existing eviction moratorium is also scheduled to expire on July 31. But the impact on rental prices will be minimal, according to Cororaton, as rental vacancy rates remain low, with some hovering at around 3 percent in metro areas.

Rents dropped significantly during the pandemic across the country. But they’re now rising at a rapid pace, as more people return to work in metro areas, boosting demand for rental apartments.

A sustained increase in rents could lead to more persistent inflation, some economists warn, as price increases are hard to reverse. This could challenge the Fed’s view that inflation is “transitory.”

“We’re going to head into a very high rent period in the next 10 years,” Ken McElroy, CEO of MC Companies, which has more than $1 billion in real estate investments, told The Epoch Times.

Soaring home prices are pushing people to the rental market. Home prices nationwide rose by 14.6 percent year-on-year in April, setting a new record, according to the S&P CoreLogic Case–Shiller index.

At the end of the foreclosure and eviction moratoriums, McElroy predicts that there'll be a healthy amount of supply in the market, but that this will cause “a little disruption” in prices.

He believes there “won’t be a nationwide crash,” but the situation could be worse in some states than others. States such as New York and Florida that have high mortgage delinquency rates could see more disruptions.

Policies such as rent controls will continue to have an effect on rent prices. In Georgia and South Carolina, for example, more than 20 percent of renters are behind on their rent.

“Every governor, every mayor, is obviously really hyper-focused on this issue. I think they’re really concerned about homelessness,” McElroy said.

Last month, the White House also announced several actions to help state and local governments prevent a “flood of evictions” when the freeze ends.

The severe housing deficit, which is a major factor fueling the prices, predates the pandemic. McElroy notes that the country was short by nearly 260,000 homes per year for the past 20 years.

And several other factors continue to boost house prices, including strong demand, supply chain issues, and the Fed’s easy monetary policy that supports the historically low mortgage rates.

McElroy predicts that home prices will peak in 2022. The homeownership rate in the United States has already dropped to 65.6 percent in the first quarter of 2021 from 67.9 percent in the second quarter of last year. A growing affordability issue will continue to reduce the ownership rate.

In addition, supply chain problems and labor shortages increase construction costs, hammering affordability further.

During congressional hearings last week, Federal Reserve Chair Jerome Powell was questioned about the impact of the central bank’s bond purchases on the housing market.

The central bank continues to buy at least $120 billion per month of Treasuries and mortgage-backed securities, expanding the money supply in the economy, which is stoking asset bubble fears.

While politicians on both sides of the aisle have expressed concerns about a housing bubble, Powell tried to play down the direct effect of bond purchases.

“There’s a great deal of cash on household balance sheets” buoyed by low spending and fiscal stimulus during the pandemic, which has contributed to the surge in house prices, Powell said.