Editor's note: This article appears in the March edition of DS News, available here.
There’s no real way to gauge how many people entering the mortgage forbearance programs will fail to resume payments. So there is no way to determine what foreclosures will look like once these programs end. Will we see a tsunami like we saw during the Great Recession? Or will it be something more manageable that won’t disrupt the market?
About 2.7 million U.S. mortgage borrowers, or 5.5% of the total, are currently in forbearance programs, according to the Mortgage Bankers Association (MBA). MBA statistics show that the total peaked at about 4.75 million in May 2020.
Right now, forbearance for federally backed mortgages has been extended until March 2021, and I believe that under President Joe Biden’s administration, that date is likely to be pushed back to September 2021. It’s a good move, because there are plenty of factors at play that could positively impact the economy by then to give borrowers ample opportunity to get back on track and resume payments.
Specifically, the current COVID-19 vaccination program will go a long way toward reopening the economy. If you look hard at the hospitalization mortality rates around this pandemic, about 81% of mortality is age 65 or higher. If we vaccinate everybody over 65 years old by May or June 2021, we're going to reduce mortality significantly, and that will allow us to dramatically reduce stay-at-home requirements.
There is a tremendous amount of capital on the sidelines waiting for the economy to reopen. Businesses have the capital to spend, and consumers have increased disposable income through savings (about 9% above pre-COVID levels). So, as mortality decreases, optimism will return, and we're going to see a tremendous amount of dollars re-engage in the economy.
The Foreclosure Market
You will see some foreclosures once the forbearance ends. It won't happen all at once, but I expect it to build gradually over an extended period. Looking at the number of mortgages that are delinquent and in forbearance, we can expect to see a range of about 500,000 to 700,000 foreclosures occurring from Q4 2020 to Q4 2021. I would be surprised if we foreclose on more than 700,000 homes. That range is de minimis compared to the numbers foreclosed during the Great Recession. This time it's not going to be anything like that. To provide some perspective, during the Great Recession, many Americans lost their homes due to foreclosure. According to real estate data, there were over 3.7 million completed foreclosures as a direct result of the Great Recession.
This time around, the market has improved, and borrowers are better positioned, with more equity in their homes. Today what we are seeing is that economies that depend largely on tourism, recreation, and leisure activities have been hardest hit by the pandemic stay-at-home regulations. That is where we are likely to see the most significant number of foreclosures. Data from two months ago shows New Jersey had the highest FHA delinquency rate at about 20%, followed by Nevada, New York, Florida, and Hawaii.
Another factor that helps this time around is that we are not overbuilt. In fact, we are underbuilt significantly, so much so that demand is far above supply and driving home prices up. Real estate has benefited greatly during this pandemic because the desirability of owning a home has been heightened by borrowers seeking more space due to work from home measures. We have also seen a great migration from packed city centers to suburbia as homeowners seek out space because they spend more time at home.
However, even before the pandemic, we saw a growing level of demand fueled by the fact that we have a population bubble in the 30- to 45-year-old age group over the next 10 years. The first-time buyer population bubble is just about equivalent to what we saw with baby boomers. So, you have a tremendous amount of demand building, and the pandemic has heightened it.
Add in low interest rates and you create a situation where it is possible to offset increased valuations and make affordability more widespread. The demand is there and, if interest rates stay low, it will be great.
The biggest issue today is supply, and builders are ramping up very rapidly to address this problem. The National Association of Homebuilders Housing Market Index hit its all-time high at the end of 2020. Builder activity has picked up at a fairly significant rate.
With all these factors combined—extended forbearance, low foreclosures, sustained low-interest rates, and growing demand for housing with supply rising to match it—I think it's going be a very, very good year for us. I expect that we will see about 5.9 million existing home sales this year, which will beat the roughly 5.5 million we saw in 2020.