Think the real estate bubble is about to burst? We’ve got news for you.

WRITTEN BY: MAX FITZGERALD
AUGUST 2021

Roll your eyes and nod your head vigorously if you've had someone come up to you and say "Just wait. Once all of the foreclosures hit the market due to COVID, it's going to dismantle the housing market. There's going to be soooo much inventory. It's going to be just like 2008..."

Here at Craft & Bauer, we've examined many different factors that have contributed to the current state of the real estate market. We've established that due to this historically low interest rate environment coupled with very low amounts of available inventory with extremely high buyer demand (due to the low interest rates), it has created a hot real estate market. Furthermore, we've examined that homeowners are staying in their homes for longer periods of time relative to the past, and since the Great Recession in 2008, have accumulated a ton of home value growth and equity. On top of that, we know that lending practices are still extremely stringent and buyers must qualify for loans.

However, we have not yet looked at the actual forbearance numbers, and how this ties into potential foreclosures that many say are looming. Their argument is that once all of this distressed inventory hits the market, it's going to create an oversupply which will hurt demand and home values. Basically, shit is going to hit the fan.

Really digest this information below because it is such an amazingly effective counter point to the speculation.

Taking a step back.

Let's recall all the way back to early 2020. When COVID hit, almost every bank (with the help of the Fed) immediately rolled out forbearance programs. This allowed borrowers to pause their payments. As agreed to, repayment of the missed payments could all be done at once, with a payment plan, or often deferred to the end of the term of the loan.

Let's now very quickly compare this housing market to the Great Recession because it does help contextualize things. In August 2008, 9.2% of all US mortgages were either delinquent or in foreclosure. By September 2009, it had risen to 14.4%. Today, only 3.4% of all mortgages are in forbearance, which amounts to 1.7 million homeowners. The vast majority of those that remain in forbearance will perform and not become a foreclosure or short sale. Why not?

Since COVID started, a total of 7.2 million homeowners have taken advantage of the forbearance program. Over 5.2 million have exited as of mid-June 2021. The vast majority, 90% are either current on their loans and paying on time, or paid off the balance of the loan in full.

Incredibly, 3.4 million, or 65%, are current and paying on time. Another 1.3 million, or 25%, paid off the mortgage through a refinance or the sale of a home. Only 333,000, or 6%, are delinquent and working with the bank to come up with a solution. That leaves 195,000, or 4%, that are delinquent and on the road to becoming either a short sale or foreclosure. That is 195,000 across the US out of the 5,200,000 that have exited forbearance.

Today, 1.74 million homeowners across the US remain in forbearance. Thanks to the steaming hot housing market and skyrocketing home appreciation, most of these homeowners have plenty of equity to sell their home. 87% have at least 10% equity, more than enough to sell and walk away with net proceeds. The 13% remaining amounts to 221,000 homeowners. Lenders have learned many valuable lessons from the Great Recession and are not all eager to foreclose. Therefore, the vast majority of these 221,000 homeowners will work out some loan modification.

But, even if all 221,000 become foreclosures along with the 195,000 delinquent that existed forbearance and are not coming up with a solution, the 416,000 total foreclosures nationally pales in comparison to the nearly 9 million households that lost their homes to foreclosure or short sale in 2008. The probable number of foreclosures is most likely less than 400,000, which would be easily swallowed up in today's ferociously hot housing market.

The bottom line.

There will be no wave of foreclosures due to forbearance. The sky is not falling. Instead, everyone should expect more of the same. The ultra-low, anemic inventory will remain, and demand will continue to be juiced due to historically low mortgage rates.

I hope this helps you guys counter all of the crazy conspiracy people in your Facebook feeds, and just in general, helps you get home buyers off of the ledge to become active participants in this market. Interest rates will normalize back up to 3.5% - 4% in the near future, and people will be kicking themselves that they didn't buy 12 months ago when rates were at 2.8%.

Much love,

Max