The K shaped Economy: The End to Mortgage Relief Programs and the Housing Boom
The COVID-19 pandemic has created two distinct real estate market forces. One involves what will happen once the mortgage forbearance relief programs end while the other involves the current housing boom. While no one can negate the seriousness of the pandemic, there are those that liken the real estate market as “A Tale of Two Cities”: for as many of us that may be struggling financially to keep our homes, there are many that are taking advantage of the housing boom that is sweeping our country.
The K-Shaped Economy
As we had discussed in an earlier blog, we are in a time where there is economic disparity. A K-shaped economy is where the economy recuperates unevenly with some able to recover and even rebound while others see things go down and get worse.
In the next few months, the more than 2.7 million homeowners who are currently in mortgage forbearance plans will see their plans coming to an end. That will pose financial challenges for those who are unemployed or earning less than before the pandemic. These forbearance programs allow homeowners to not pay their mortgages for a maximum of twelve months.
Emergence of Loan Modifications
Lenders can offer loan modifications, including lower interest rates or longer terms to reduce a borrower’s monthly payment. This will certainly help those borrowers who have found employment aside from stimulus payments or unemployment benefits so that they are able to qualify for the loan modification.
The Role of the Housing Boom
Courtesy Saul Loeb | AFP | Getty Images
As the K shaped economy unfolds, the number of homes listed for sale is the lowest on record since the National Association of Realtors began keeping records almost forty years ago. Realtors have told us that finding a suitable home for their clients is like the early days of the pandemic when there was a shortage of toilet paper.
Thus, with a tight inventory and record low interest rates, homeownership, for those who already own a home, has become cheaper with the ability to refinance at interest rates at approximately 2.5%. Lifestyle changes, due to dramatic changes in increases in remote working from home, created a tremendous market surge for many to purchase larger homes during the pandemic. Also, at the same time, homeowners with mortgages have seen their equity increase by approximately 10.8% during the crisis as home prices have increased due to the disequilibrium in the marketplace, causing bidding wars above list price for the most desirable homes.
What does this all mean?
As this pandemic continues to cause havoc, we are at a housing crossroads. For some of us, the end to mortgage forbearance programs may ultimately result in a potential loan modification or foreclosure. For others, the pandemic has created opportunity to refinance and/or to purchase larger homes elsewhere to accommodate working remotely.
Once the foreclosure floodgates reopen…and they will…we anticipate that home prices will adjust. However, unlike the last foreclosure crisis, many people this time have equity in their homes. As a result, we may see fewer short sales where the banks will agree to take a short payoff of the outstanding mortgage. Instead, we may see more distressed sales or protracted foreclosures where homeowners decide to burn off their equity and fight the banks for one or more years to buy enough time to move forward with their lives.
In any event, there will be enormous opportunities, for Realtors, investors, and everyone else in the real estate industry to assist with the “Great Reset”.
As most of you know by now, we have been here for over 30 years serving the South Florida real estate community. Whether you wish to purchase, sell, refinance, negotiate loss mitigation strategies with your lender, or whether you face foreclosure, our team of professionals both at our law firm and our sister company, Weston Title & Escrow, are here to assist you.
As always, we will get through this together and will guide you through these challenging times.
From the Trenches