(This piece originally appeared in Forbes.com.)
The top real estate story in many parts of the country is the unexpectedly low number of houses that are for sale right now. When COVID-19 hit, the number of houses being put up of sale tanked but so did the number of houses sold. Since then, in some metros, the number of houses being sold has rebounded to near normal levels but the number of houses for sale remains very low.
Because of that low supply of houses for sale, house prices are unexpectedly strong despite the incredibly steep increase in unemployment. Are mortgage forbearance programs a factor in this low supply? Could we see a rush for the exits and a lot more houses hitting the market when the mortgage forbearance programs eventually end?
Last week Fannie Mae and Freddie Mac pushed the end of their mortgage forbearance programs from July 30 to “at least” August 31. Nationally, about 9% of all mortgages are in forbearance. Of those in forbearance, about 75% are Fannie, Freddie, FHA or VA mortgages.
I’m certainly not an expert on politics but I can’t see how the government ends these mortgage forbearance programs before the November election. After that we’re in December and remember how the media blasted December foreclosures during The Great Real Estate Bubble? It became common for banks to stop all foreclosures and evictions during December.
I think it’s likely we’re looking at January before we start to see the end of mortgage forbearance programs at Fannie, Freddie, FHA and VA.
Oh yeah, after they eventually end their mortgage forbearance – the way it stands now, anyway – mortgage owners may qualify for another 180 days of forbearance.
No Hurry to Sell
As long as you’re in forbearance, you’re in no hurry to sell your house because you don’t have to make your mortgage payments anyway. If you sold your house before forbearance ended, you’d have to rent a place and actually pay rent.
A bigger reason for the low number of houses hitting the market is, of course, the recession. People sell their homes when they take new jobs and move to new cities. There’s a lot less of that going on now.
But the low supply of houses going up for sale may partly be an unintended consequence of mortgage forbearance programs. We’ve never had such programs before and don’t know what their secondary impacts might be.
A Wave of Supply Coming?
Let’s assume that having millions of mortgages in forbearance tends to lower the number of houses being put up for sale and that in turn tends to put upward pressure on house prices.
In this scenario, the upward pressure would continue until the forbearance programs ended. After that — when these homeowners have to start paying their mortgages again — the number of houses going up for sale would be above normal and that in turn would tend to put downward pressure on house prices, or at least remove some of the upward pressure.
When I first saw this problem of low supply, I assumed it was caused by home sellers being worried about COVID-19 and not wanting strangers in their homes. But if that was the case, I think we would have seen some rebound by now in the number of houses hitting the market. In Phoenix anyway, we haven’t seen more houses hitting the market. The number of houses under contract to buyers has completely rebounded and is above the level for this time last year. The number of houses being put up for sale, however, is still running at April pandemic levels.
If we start to see more and more houses being put up for sale before the forbearance programs end, that would suggest that today’s low supply of houses for sale was indeed caused by seller fears of COVID-19 and having strangers in their homes.
If, however, we don’t see that but we do see a jump in supply soon after mortgage forbearance programs end, that would suggest that the forbearance programs themselves were a significant cause of the low supply we’re seeing now.
In fact, if we do NOT see the supply of houses for sale rebound soon, that would suggest that we will see a significant increase in supply when homeowners in forbearance have to start paying their mortgages again.
Keep these scenarios in mind if you’re planning to sell your house within the next year. The real estate market dynamics might change when the mortgage forbearance programs end. It’s hard to imagine the real estate market being any better for single-family home sellers in a recession than it is right now.
Finally, maybe the low supply is being caused by something else entirely. Even before COVID-19, the number of houses hitting the market in January and February was unusually low. Whatever was driving the low supply back then may have been accentuated somehow by COVID-19 and it’s driving the even lower supply today.
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