When Will We Crash? Is this how it ends?

With a global pandemic, civil unrest, wild fires burning the west, unemployment, 1 in 5 mall businesses closing and the politics leading up to the election, 2020 has been a dumpster fire of a year. Is it the end of the housing market as we know it? Well…it could be worse.

The marshmallow fluff on the cake, it has been said, is that we are facing a housing crash of enormous size. When… not if they say.

It’s such a common theme that real estate and mortgage experts nationally are getting asked this question more than any other….still today. The public has a perception that the bubble will burst like 2008.

But I have good news… well kinda good. In the world of Mortgage Foreclosures it’s looking like it may not be nearly as bad as the Great Recession.

Post Great Recession Growth of Equity to Debt Ratio

Yeah, in todays world – that is what constitutes “Good News”. Pretty sad.

News outlets have been continuing to suggest a catastrophic housing crash greater than the great recession. They’ve said that the pending crash would cause a flood of forbearance and foreclosures to drown the market with supply. This supply would cause home prices to drop off a cliff, with sellers being underwater seemingly overnight.

Millions of homeowners have been taking advantage of the forbearance, and they would all exit at the 90 and 180 day mile markers. Its easy to see – After all, we saw this same issue overwhelm the market with supply like we saw from 2007-10?

Image: SHANNON VANRAES

Well, Not according to Mike Simonson of Altos Research.

On his October monthly report, Simonson clearly showed that unlike the highly leveraged, high LTV housing market of the time, where people had loans that went quickly underwater as the market turned – this time it’s different. In 2020 loan to value ratios are much better – with billions of dollars of equity that will prevent people from walking away from their homes.

Additionally, the forbearance to foreclosure ratio are less than originally projected.

“As of September 20, 6.87% of mortgages were in forbearance, which is 3.4 million loans. This is down from 8.55%, or 4.3 million loans as, of June 7. – Since the MBA started publishing data on homeowner exits from forbearance in early May, a large percentage of exits have been attributed to homeowners who went into forbearance but never stopped paying their mortgage.” Mortgageorb.com

“Ray, If someone asks you if you are a God, say… yes.”

Anecdotally I’ve talked with homeowners who selected the forbearance option, since they were unsure about the future of the economy and their employment. This is a reasonable action considering the uncertainty and lack of risk in taking forbearance. (it was easy) After the forbearance period ended, they negotiated with the lender and moved forward and are continuing to pay the mortgage, rather than walk away from their equity.

That makes sense.

If people have equity, they are aligned with banks, who are incentivized to keep the value of their assets high (and paying on time).

My concern remains on the opposite side of the coin. Unlike the great recession, there is no flood of listings. This time, it’s the lack of supply that will forever impact the housing market and industry.

In the middle of the great recession, people couldn’t unload homes – agents suffered with a ton of listings, and no buyers. This caused agents to flee the industry in record rates.

Today, housing prices are soaring, DOM is dropping, sales are out pacing new listings. Our industry is built on volume – and we continue to trend towards a critical supply issue the likes of which we’ve never seen.