Today’s market conditions are reminding us of the foreclosure crisis of 2008. Early optimism for 2020 real estate quickly faded into pessimism with the spread of Coronavirus. The pandemic has brought dire uncertainty to the nation’s economy. Investors and homeowners alike fear that we’ll have to relive another housing market crash. These concerns are nothing but valid. And it’s crucial to discuss them to be able to predict real estate market conditions in 2020 and well into 2021. So what are experts saying about a potential foreclosure crisis? Let’s dive right in.
What Causes a Foreclosure Crisis?
Foreclosures occur when a homeowner (or real estate investor) continuously fails to make their principal mortgage and interest payments, resulting in mortgage defaults. The lender in turn takes control of the property and attempts to sell it. What we experienced in 2007 through 2010 was a significant increase in these defaults, all the while, other market conditions were worsening.
To determine whether we are to expect a foreclosure crisis in 2020, let’s begin by examining the root causes of the phenomenon. The main cause of foreclosure crises is tied to homeowners’ inability to meet loan requirements – ie their inability to pay off their mortgage payments and debt. This can be affected by:
- External factors such as the COVID-19 pandemic we’re currently experiencing. While the threat of pandemics is always present, no one could have foreseen Coronavirus’s effects on the US and global economy.
- Internal market factors such as those witnessed in the 2008 crisis. The crisis in that case was one of the many aspects and consequences of the Great Recession.
Then and Now: A Brief History Lesson
What was the difference between the 2008 crisis and what is happening in 2020?
We’re drawn to make comparisons because of the reality of today’s market, as well as the general skepticism we’re feeling. But is the 2008 crisis similar to today’s? And what do the two periods have in common, if anything?
The circumstances of both periods are quite similar. We’ve seen a surge in unemployment rates nationwide, coupled with a slow down of every industry, including real estate. Some investors were more affected than others, such as those who are involved in commercial or Airbnb investing, namely in epicenters of the disease.
At the same time, there are evident distinctions between 2008 and today’s circumstances. The most telling difference is the fact that 2008 was a debt crisis, while 2020 is a disparity of income emergency. Back then, banks and mortgage lenders were lending to real estate investors and buyers. The banks were backed by Wall Street private-label securities market (PLS) in unregulated markets, which did not have very strict lending requirements. This, in addition to numerous complex and interconnected components, were all brewing leading up to the crisis. The PLS, bad loans, and decreasing housing values were all reasons for the foreclosure crisis in 2008.
The Present
Today’s conditions, on the other hand, strike quite differently. What we’re experiencing today is an income crisis. Simply said, people aren’t making enough money to be able to pump it back into the market, and that includes paying off mortgages and other debts. COVID-19 has cost millions of Americans their jobs this year. Since COVID-19 cases began to peak in late March, people began to lose their jobs nationwide. In April, the unemployment rate hit a record high of 14.7%. The rate has since then gradually decreased to a record of 10.2% in July 2020. Finally, 2020 is seeing an undersupply in housing inventory with some sellers taking their listings off the market and a halt in major real estate projects.
What Are the US Housing Market 2020 and 2021 Predictions?
Here’s what we know…
Based on the information we have today, housing market predictions indicate that home prices in the US are expected to slightly dip, by 0.5%-3.0% over the next few quarters. Some analysts expect the dip in prices, in addition to the tight inventory, to recover by Q3 of 2021. Other experts predict that home prices will drop, but that they won’t recover before all economic hardships are relieved post COVID-19. All in all, past and current housing market trends tell us one thing: recovery is bound to materialize. That’s what’s great about real estate – with the right intervention, the market eventually recovers.
Related: US Real Estate Market Recovery Underway Amid COVID-19
So, Will There Be a US Foreclosure Crisis in 2020?
Or perhaps the foreclosure crisis will rear its head in 2021?
In short, it’s possible but unlikely. Again, it’s easy to make assumptions and comparisons due to the conditions we’re living through. Nonetheless, most experts state that while home values will drop, and while foreclosures may take place across the nation, we are unlikely to experience a foreclosure rate similar to that of 2008.
Another point to consider that backs this claim is the following. While banks were part of the reason for the housing market crash in 2008, that’s not the case today. Contrarily, banks are working to support homeowners through the crisis through deals that allow owners to defer payments under foreclosure moratoriums. Moreover, some states have imposed laws to suspend foreclosures and tenant evictions. In March, Congress also passed the CARES Act, by which it enacted a stimulus package of $1,200 in addition to $500 per child. The second package of the year is in the works. There’s hope that these stimulus packages will help alleviate many of the effects of the income crisis, which will in turn reflect on the economy as a whole. This may cause struggles later on, but current loan requirements and underwriting agreements make it difficult for a 2008 déjà vu, thankfully.
What Does All of This Mean for Real Estate Investors?
If you were reading this blog with the hopes of finding out that there would soon be a larger number of foreclosed homes in the 2020 pool, you may not be in luck. Nonetheless, and despite current volatile circumstances, we do advise looking into real estate investment options this year if you are in a good financial situation. The low mortgage rates coupled with recovery potential in 2021 are all good incentives to invest in real estate right now and buy a rental property.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Related: Investment Property Mortgage Rates 2020: COVID-19 Update
It’s vital to mention that conditions are constantly evolving, so make sure you continue to learn to stay up to date on the latest trends and predictions when investing during COVID-19. Check out Mashvisor’s Coronavirus Real Estate Trends to learn more.