A startling number of American households are currently not paying their mortgages. This number is at 4.1 million and this data was before we entered what now appears to be a second shutdown as cases of the Coronavirus spread across the country. Yet somehow, people think the housing market is going to be perfectly fine. The reality is, there are massive systemic shocks that are hitting the system and housing is always a lagging indicator. In California, the unemployment rate is at 16.3 percent which is the highest since the Great Depression. The forbearance issues run deep since missed payments are now compounding on top of each other meaning many households now owe multiple payments to keep up. Many missed a payment because they are unable to make one payment so now that people need to make 3, 4, or more payments all at once, there will be challenges. Yet more importantly, think of places in Los Angeles with good schools. Many are moving to online delivery of coursework this year so that premium on good schools is not worth it if you are essentially paying for a virtual learning model where your student is taking classes from their laptop. The housing market is facing challenges but you wouldn’t know that by simply looking at price.
The delusional crowd
First, let us look at the number of mortgages in forbearance:
A stunning 4.1 million mortgages are not being paid – over 8 percent of all mortgages in the market. This is significant. These are similar figures from the Great Recession although people will be quick to talk about NINJA loans but the reality is, the vast majority of foreclosures came with vanilla 30-year traditional mortgages. The boogie man is the NINJA loans but the end result was that people just couldn’t pay their mortgage when they lost their jobs. What does it matter if your monthly payment is $1,500 or $5,000 if your income stops?
Another startling figure is the amount of Americans that have seen someone in their household losing income. See data from the Census:
Roughly half of Americans have lost some amount of income within their household. This is incredibly high and problematic. The initial job losses came in retail and face-to-face fields but now we are seeing white collar jobs being cut since many of these companies have tech departments, accounting support, and other ancillary functions that need funding from the actual business in the community. Expect more of this if the pandemic continues to create lockdowns.
There are large implications here and many of the measures taken are essentially stop-gaps:
Like is the case in most economic downturns, many businesses that did not need bailouts were actually recipients of programs like the PPP. Many owners of restaurants for example are still struggling and having a tough time getting back on their feet.
From looking at the language of these programs and their essence, it seems like they were built for a 3-month crisis. As we enter our fourth month, this economic and healthcare crisis is not going to be a short one contrary to what some have been saying. Just think of Los Angeles County where schools were set to go remote for the remainder of the year. How are working parents going to teach their kids at home and go back to work at a high level of productivity? This is not a judgment call here, but the fact of the matter is we are going to see substantial loss in business activity which directly ties into housing.
There are some significant challenges facing the housing market and those thinking there will not be some sort of correction are simply not looking at the larger macro impact of this pandemic.Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information