How Will Forbearance Rates Affect the Real Estate Industry?

The US forbearance rate recently increased to 5.54%. This means that an estimated 2.8 million homeowners are in forbearance, according to the Mortgage Bankers Association. So what does this mean for the real estate industry?

 

First, let’s define forbearance. Forbearance is when a mortgage service or lender allows homeowners to temporarily pause or decrease mortgage payments. Forbearance doesn’t forgive the loan – it just buys homeowners some time in case of hardships like unemployment, illness, or a natural disaster. After a forbearance plan ends, homeowners need to pay back the amount that was paused or decreased.

Now fast forward to the pandemic. Forbearance looks slightly different in 2020/21.

 

Because of the Coronavirus Aid, Relief and Economic Security (CARES) Act, forbearance terms are a little more lenient and a lot more popular. In fact, the Federal Housing Finance Agency just allowed the fourth extension to its moratorium on foreclosures.

 

Extensions and penalty-free terms have provided extra leeway – which was especially helpful as US unemployment rates rose to nearly 15% this past spring. When CARES first passed, about 4 million mortgages went into forbearance.

 

So while the forbearance rate recently increased compared to the previous week, overall forbearance plans have dipped under 3 million. Here are some quick reasons why:

  • Six-month forbearance plans recently expired
  • Many jobs are coming back as businesses reopen
  • Some people will voluntarily end forbearance as they return to work

 

Will there be a housing crash as forbearance plans end?


Some industry commentators are pretty doom-and-gloom about forbearance rates. They say once forbearance plans end, many homes will go into foreclosure. In turn, this will drive up inventory and force prices to plummet. But this theory is faulty – especially considering what happened in 2012. Eight years ago, many people thought the influx of foreclosed homes would crash prices. But that year (and beyond), demand kept up with supply.

 

While history doesn’t always repeat itself, 2012 is a good marker. If lower forbearance rates lead to foreclosures, the real estate industry doesn’t have to suffer. And that’s a pretty big “if.” We still don’t know if the end of pandemic forbearance will lead to excess foreclosures in the first place.

 

And here’s some more food for thought: Real Estate Data Analyst Logan Mohtashami points out there hasn’t been an “overheated multi-year credit bubble among mortgage holders,” so it’s unlikely the market will crash even if foreclosures increase. He also uses the last housing crisis as an example. In 2008, the US had more than 10 million delinquent home loans. Because of lenient lending standards at the time, many borrowers had very little equity. The market crashed and home prices fell.

 

So what’s different this time? For starters, the demand is still there. October 2020 was the fifth consecutive month of existing-home sale growth. Even with a dip in sales earlier this year, we’re on track to reach 7 million sales by 2021 (Figure 1).

existing-home sales
existing-home sales

Figure 1. Source: www.advisorperspectives.com/dshort/updates/2020/11/19/october-existing-home-sales-5th-consecutive-month-of-growth

 

Plus, most people have more equity in their homes than they did a decade ago. If homeowners do become delinquent on loans after their forbearance ends, there’s a good chance they’d be able to sell before they’d ever lose their home. Only time will tell whether these homeowners will have enough equity to buy again. But right now, the real estate industry is safe despite the slight increase in forbearance rates.

 

As unemployment descends, real estate soars

Another important consideration: just as nested equity rises alongside home prices, jobs are coming back. While peak unemployment reached 14.7% in April, the US Department of Labor just marked unemployment at 6.9%. That’s a huge (and promising) decrease – probably due in part to technologies that can sustain a virtual workforce. To put it in perspective, the 2007-2009 Recession saw a peak and prolonged unemployment rate of around 10%. We aren’t mirroring what happened back then. 2020 is a different animal.

 

Ultimately, for the real estate industry to crash in 2021, there needs to be a perfect storm of delinquent loans and high unemployment. Fortunately, the weather looks pretty sunny from here.

 

Have something to say about real estate trends? Contact us today.

 



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