A burning question on every homeowners mind has been Does a Recession Create a Housing Crisis? If you own a home today, odds are you recall the housing crisis of 2008. Neighborhoods across the US and yes, even in our little county, were littered with bank owned properties and no buyers in sight.
As our country navigates through the current recession, it might be tempting to predict that history will repeat itself with another housing crash fueled by a wave of home foreclosures. So, what precautions may be preventing this familiar fate?
Recession and Housing Crisis Key Take Aways:
- The COVID-19 pandemic is causing an economic slowdown.
- The good news?? Home values actually increased in 3 of the last 5 U.S. recessions and decreased by less than 2% in the 4th.
- All things considered, an economic slowdown does not equal a housing crisis.
- Aggressive measures were taken to prevent a repeat of 2008. [1]
1. Loan Forbearance Programs
The homeowners reading this can most likely remember the chest tightening anxiety surrounding your mortgage payments in the spring of 2020. Will we keep our jobs? Could one of us be laid off? If so, how will we possibly be able to afford our home? Most of these questions would naturally lead you to ask will this recession create a housing crisis like last time.
The federal government has responded very differently to the current economic crisis than they did to the 2008 crisis. One of the biggest moves was implementing a home loan forbearance program. This program allows many borrowers to suspend their monthly loan payments until their economic circumstances improve. Not sure if your loan qualifies? The Consumer Financial Protection Bureau can help. In fact, these efforts have helped roughly 6 million borrowers. [2]
The good news? By the time the initial phase of the forbearance program ended, many borrowers were able to either pay off their mortgage or discontinue forbearance because they found they were able to continue making their monthly mortgage payments. Less than half of borrowers initially in forbearance chose to extend forbearance, and only 80,000 borrowers (just 1.4% of borrowers in forbearance) chose to move towards foreclosure.
2. Interest Rates
The Federal Reserve has lowered interest rates to help businesses during the coronavirus pandemic. It should continue to help the housing market well into 2023, too.
A major precursor to the housing crisis of 2008 was the way that home loans were structured. Many borrowers then had interest-only loans and adjustable-rate mortgages. Unlike a conventional loan, the interest rates rise along with the fed funds rate (which remains at .25% at time of this blogs publication 12/19/2020).
In addition, many mortgage holders in the early 2000s also had introductory teaser rates that reset after three years. When the Federal Reserve raised rates at the same time they reset, borrowers found they could no longer afford the payments. Home prices had fallen, so these mortgage-holders couldn’t make the payments or sell the house. As a result, default rates rose.[3]
3. Home Equity Upturn
The large majority of borrowers currently in loan forbearance have quite a bit of equity in their homes. Unlike the equity utilization levels of 2006 and 2007 leading into the 2008 crash. These days, homeowners typically have more than enough equity to benefit from a sale and still have a little money left in their pockets. If you’re currently in loan forbearance and curious about your options, contact your lender.
Housing Moving into 2021
It is inevitable that our country will experience some increase in foreclosures in 2021, but the increase should be relatively modest for the aforementioned reasons. To shift the housing market in a noticeable way it would take a great deal more than a modest increase in foreclosures.
While a foreclosure crisis is not very probably, we will continue to see unprecedented financial ramifications from the COVID-19 Health Crisis for years to come. My best advice? Cuddle your toilet paper and make informed, prudent financial decisions (when in doubt, contact your financial advisor).
Read up on the 10 Warning Signs of a Housing Market Crash.
Sources: The New York Times, Core Logic, Keeping Current Matters, South Sound Property Group, National Association of RealtorsⓇ, Consumer Financial Protection Bureau