The Serious Disconnect Between A Hot Residential Real Estate Market And The Coming Tsunami Of Foreclosures
Various reports show that the market for previously-owned homes climbed nearly 10% in September, the fourth straight monthly increase. It is not just sale volumes that are high, but the price of homes is showing double-digit gains. If you just look at volume and prices, the U.S. residential real estate market looks as rosy as every, spurred on by very low interest rates from the same Federal Reserve which once-upon-a-time was tasked with preventing bubbles above all else but during the last three decades has arguably been the chief cause of them. That’s the sunny side of the street.
The shady side of the street is much different. Mortgage delinquency rates are at a 20-year high ⸺ worse than the 2008 high if that tells you anything (and it should), and there are predictions that at least two million mortgages will soon go into default. And that is just the tip of the iceberg, as an estimated six million folks missed their mortgage or rent payment in September. The economic news isn’t too hot either, as the so-called “third wave” of coronavirus cases that is beginning to his the U.S. is already proving to be the worst yet. The U.S. unemployment rate is still a relatively-high 8% or so, and the summer decrease in unemployment is slowing.
These are the views that may be derived from governmental data and other credible new reports. You didn’t need me to tell you any of that. What I am going to tell you about is what I see everyday going on in the trenches, meaning in the courts where so much of the legal activity relating to foreclosures takes place.
It is a disaster. The shutting down of our state and federal court systems beginning in March of 2020, at least as they related to most civil matters, has now created huge backlogs of matters for the courts to work through. Even if there were not any foreclosures for the courts to handle, the courts seem to be anywhere from six months to a year behind where they ought to be in disposing of matters. The courts’ processing of litigation is also significantly slowed by the procedures still in place because of COVID-19 which have required less-efficient off-site working by many courtroom personnel.
Next, the various moratoriums on foreclosure have kept lenders from being able to even start their processing of defaults. When the lenders finally do get rolling with foreclosures, they are going to be at the back of the increasingly-long litigation line and a judicial foreclosure that starts today is probably not going to be processed until mid- to late-2021 if the lender is lucky.
This is why a bubble exists, which arguably is an economic discrepancy between true supply and true demand. While there may be a short-term demand that is now reflected in prices, this can be attributed to the pent-up demand for home purchases from the March-July period when much of the nation was in lockdown and nobody was either showing or visiting homes for sale, a greater demand for homes in the suburbs caused by the coronavirus lockdowns in city centers, and of course, historically low mortgage rates. So in the short-term, demand has increased slightly in some areas, mostly suburbia.
The problem is that supply in the form of foreclosed homes (and homes voluntarily sold to avoid foreclosure) is about to overwhelm demand by many magnitudes. When the tsunami of foreclosures finally hits the markets, prices are going to plummet again ⸺ just like they did in the 2008 crash ⸺ and many folks nationwide are going to find themselves once again in a negative equity situation where it makes more sense for them to simply hand the keys to the bank than it does to continue making payments. This will exacerbate an already bad situation; again, just like it did in 2008.
As if that were not bad enough, collateral (both personal and commercial) has been deteriorating generally, and this will eventually result in a credit crunch that will cause more restrictive lending prices and also drive up the costs of borrowing. That will not be good for the market for residential real estate, at all.
The point of all this being that if you were thinking about getting out of your existing home anyway for whatever reason, such as that you are not too far from retirement and wanted to downsize, then now is the time to seriously consider the issue when there remains a small window open for probably no more than a few months whereby you can cash out near the top of the market. Conversely, if you are looking to upgrade your home or the location of your residence, and have the cash to do so (and are not just relying on your existing equity), then just be patient and read up on how to buy properties at sheriff sales. Otherwise, you may be at serious risk of buying at the high of the market and may end up waiting some years to get your money back.
As a side note, when crashes do occur in residential real estate markets they usually take a few years to fully bottom out. A glance at the historical charts confirms what I believe from my own experience, which is that it often takes three to five years after the crash starts for home prices to reach their lowest lows before finally rebounding. Of course, most value is lost in the first two years after the crash, so if the crash occurs in 2021 then keep your money in the bank until at least 2023 and then start looking for bargains.
By the way, if you think that what is going to happen in residential real estate will be bad, then take solace in knowing that what is about to happen in commercial office space will be much worse. Many companies have figured out that many of their employees work just as well from home, if not more efficiently from home, and are thus substantially downsizing their lease footprints causing a crash in that market already. If you are faced with either owning a heavily-leveraged 30-story office building or a truckload of turnips, take the turnips.