My best friend from college is an accomplished, beloved, and skilled (National Board certified!) high school English & journalism teacher. She’s done everything she was supposed to do; she started working after school at a Christian bookstore at 16 years old, saved her earnings, refrained from going out and spending wildly, etc., because she knew that if she wanted to experience financial stability in her twenties, like buying her first home, that’s how early she needed to start.
Now we’re in our twenties and she’s ready to buy a house and move out of her apartment. She has an elderly cat and a young German Shepherd - all they need is a small place in Hillsborough or Durham with enough outdoor space for the puppy. She’s done everything right. She has a healthy down payment, a great credit score, and a practical mindset.
But it’s the summer of 2021; every time we speak, we talk about the overwhelming anxiety that comes with watching every home in her price range sell five figures above asking price with due diligence checks that make her reasonable 10% down look like pennies.
When she sent me this TikTok video and asked, excitedly, “is this &%!^ing true??” I knew this phenomenon was starting to turn some heads and would be worth discussing. Yes, it’s true: some 40% of Americans missed their mortgage payment in April 2021. 25% have missed more than one payment since the start of the year.
What Does This Mean?
This post is for those in the fortunate position of being poised to take financial advantage of the nation’s economic recovery through real estate investment. If you are in the 40% missing their housing payments, I say this with all sincerity: my heart goes out to you, and I hope you are able to get back on track soon.
If, like me, you’re looking for the highest-return and lowest-risk investment opportunities, you need to be paying attention to federal mortgage forbearance. An overview of COVID-19 hardship forbearance can be found here. In short: HUD/FHA, USDA, or VA borrowers must apply for initial forbearance no later than June 30, 2021, and Fannie Mae/Freddie Mac borrowers do not currently have an application deadline. Initial forbearance can be 3-6 months, with the option to apply to extend to 12 months.
Forbearance means foreclosure proceedings cannot begin on defaulting borrowers until their forbearance, or grace, period expires. At the end of their grace period, borrowers are responsible for paying all missed payments, regardless of the state of their finances at this time. With 40% of people having missed one payment and 25% missing more than one, millions of Americans will soon be staring down the intimidating and stressful process of being foreclosed upon by their banks for nonpayment.
Standup comedian John Mulaney described having a mortgage in the best and most succinct way I’ve seen to date: “A bank bought a house, and I get to keep my shirts and pants there while I pay it off for 30 years.” If you stop paying it off, the bank no longer permits you to keep your shirts and pants there.
With residential housing in the Raleigh-Durham areas being in such high demand with relatively low supply, the resumption of foreclosure will forcibly liquidate housing supply that was previously held up by mortgage relief. Not only will we have more houses available for purchase, but their sale price is going to be lower than what it would be if the owners sold in a traditional re-sale transaction. The bank will try to recoup as much of its losses as possible rather than be concerned with riding the wave of increased housing prices.
The foreclosure market in Raleigh-Durham is going to take off as homeowners gradually lose the federal government’s support in keeping the lenders at bay. It will be a crapshoot whether or not these homes are in good shape or not; regardless, they will be the answers to many prayers said by frustrated home buyers.
What About the Bubble?
It's not a bubble. It's supply and demand.
In 2008, the real estate market crashed after a housing bubble popped. Mortgage lenders were lending obscene amounts of money to underqualified people who quickly turned around and defaulted on the loan they had to stretch to get in order to purchase an overpriced home. Money was too cheap and houses were overpriced to keep up, thus creating an artificial bubble.
Since 2020, the price of a certain type of house (suburban, single-family & townhomes, to be brief) has skyrocketed. My townhome in North Raleigh was worth $190,000 in 2019. Now, identical models across the street are selling for $250,000 (closed March 2021). That home was listed at a reasonable price of $220,000 and someone chose to pay $30,000 more. They didn’t have any certainty that their lender (if they used one) would agree the house was worth $250,000 and finance the whole purchase since the house wasn’t priced that high.
It’s Economics 101: with fewer desirable houses available, those that are will sell for more money because there are more people competing to buy it. One of my own listings on the Raleigh/Cary border went under contract for almost 120% of list price after a bidding war between sight-unseen buyers. I didn’t have time to have any showings or an open house before my seller accepted a very compelling offer; competition is that fierce. Just look on Zillow for recently closed sales in any suburban neighborhood in Raleigh, Cary, or Apex. I’ll bet you dollars to donuts at least 75% of nearby 2021 sales closed over the asking price.
Increased liquidity in housing supply will not burst a market bubble, because there isn’t one to burst. Increased liquidity will relieve pressure on and lessen competition & demand for these desirable suburban homes.
Buyer’s agents will, more than likely, rejoice. We will pray to the real estate gods for relief from having to have the same conversation - “Your offer was rejected in favor of someone willing to pay $60,000 more” - with increasingly discouraged bustomers. Listing agents may even have to start actively marketing their listings again soon.
Hang in there. This housing market insanity will not last forever. Just keep an eye out for an increase in foreclosure listings near you, and watch the news for information on the federal mortgage forbearance programs.