Contrary to what industrial experts anticipated, the US real estate market is booming. Even during the uncertainties of the COVID-19 catastrophe, there seems to be a keen appetite for buying properties. However, demand is signifying a price increase for new and older homes. When Economists put on their model thinking hats, there are several questions left to answer. How does the pandemic connect to home prices, and how does the moratorium effect make a difference?
Effects of property prices on homeowners and several industries
The US Federal Reserve cut down on the interest rates in March to near zero to mitigate the economic crisis. As a result, people who were still employed were empowered to buy properties.
However, the pandemic recession was concentrated on travel, tourism, hospitality, retail, and restaurants. So, markets like Las Vegas or Orlando were the hardest hit as their industry was entirely built on entertainment, travel, and tourism.As compared to homeowners, renters suffered more from job losses. This may keep foreclosures from spiking.
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Housing prices amid moratoria and forbearance programs
A massive drop is witnessed in the foreclosure activity as compared to 2020. The moratorium and the “CARES Act” mortgage forbearance programs have temporarily halted foreclosures. The federal government had proactively shielded homeowners from the economic crisis. So, while housing markets remained strong, the empty homes in the foreclosure process continued to disappear in the first quarter of 2021.
The moratorium that started in March 2020 affected 70 per cent of home loans in the US. The temporary ban has been extended this year till June 30 as enacted under the CARES Act. Even private lenders have offered mortgage extensions.
The big question revolves around the foreclosure moratoria and forbearance program’s end. With close to 4.5 million households excused from paying their mortgage or rent for the past 12 months, will they catch up on payment?
The chances of fulfilling mortgage or rent payments are close to zero percent. Therefore, with a homeownership rate of 64.8 percent, we can expect 2.9 million homes in foreclosure. That’s a huge number that will lead to a home price reduction. There will be an apparent lag time of defaults to the house being an REO (real estate-owned or bank-owned property). Hence, we should expect a significant home price reduction in the third quarter of 2022 or even the third quarter of 2023.
However, the future holds no promise of a perfectly analyzed prediction from present circumstances. The real estate market might lean on either side of the price scale, based on volatile factors, such as:
- The federal government carrying out the fourth stimulus
- A postponing of the eviction moratorium
- A drop in hyperinflation
In the past 12 months, the US government, across two administrations, printed 40% more money. This step will increase the housing prices in the market and is expected to continue to rise. Also, prices will continue to grow in the commercial real estate market five years down the line unless interest rates take a significant jump.
