With the housing market as hot as it is now, many are wondering what will happen down the road when forbearance plans end. Will there be a sudden surge in foreclosures? Is it going to look like the housing market 15 years ago? 

 

When we look at some key factors, it looks as though a wave of foreclosures isn’t about to happen. Today we’re taking a deeper dive into those factors and what exactly the market is telling us that leads us to believe this. 

 

Fewer Homeowners At Risk

One key indicator to keep in mind is the number of individuals at risk of foreclosure. During the last housing crash, about 9 million households lost their home due to foreclosure, short sale, or they gave it back to the bank. 

 

So how do we compare to that today? Today, we’re seeing about 1.86 million mortgages in forbearance which is significantly lower than what we saw in the past. When the stay-at-home orders were issued early last year, many experts projected that we would see a similar trend with the housing market that we did during the last crash. They predicted that 30% of mortgage holders would enter the forbearance program. In reality, only 8.5% of mortgage holders did, and that number is now down to 3.5%. 

 

Don’t Forget About Equity

Let’s take a deeper dive into the 1.86 million who are in forbearance. Of these homeowners, 87% have at least 10% equity in their homes. This means that these homeowners could sell their homes and pay off any outstanding expenses rather than facing foreclosure or short sale. The graph below from Keeping Current Matters depicts the abundance of equity that we’re seeing today vs what was available prior to the 2008 housing collapse. 

 

Now, if we look at the 13% who are not in this situation, we’re left with about 241,800 mortgages. It’s critical that we put this number in context and compare it to the foreclosure numbers of past years. Keeping Current Matters states the following:

  • In 2017, there were 314,2000 foreclosures
  • In 2018, there were 279,040 foreclosures
  • In 2019, there were 277,520 foreclosures

 

What this shows us is that the number of possible foreclosures coming out of the forbearance program is not an extremely high number and is actually lower than what we saw in the years that were pre-pandemic. 

 

We Need the Additional Inventory

In the past housing crash of 2008, the number of foreclosures hitting the market resulted in an excess supply of homes for sale. Today, the situation couldn’t be more different. In 2008, there was a 9-month supply of listings for sale. Today, that number stands at less than 3 months.

 

Chief Economist at the National Association of Realtors (NAR), states that any foreclosures that result from the forbearance program will be absorbed by the market and will not lead to any price declines. 

 

No One Wants a Repeat of 2008

When talking about the housing market, 2008 remains to be a history lesson that no one wants to repeat. In fact, the White House released a statement about how homeowners with government-backed mortgages will be given further options to help them keep their homes when entering into forbearance.

 

Additionally, according to an article posted by Inman, before initiating foreclosures against borrowers who are 120 days behind on their payments, the Consumer Financial Protection Bureau expects loan servicers to reach out to borrowers and give them a chance to apply for additional assistance, such as loan modifications before proceeding with foreclosure. 

 

Bottom Line

If you’re thinking about purchasing a home, you might be wondering what is going to happen as the forbearance program comes to a close and what it means for the housing market. The good news is that it’s looking like the impact will be minimal, and everyone is on board to prevent another crash as we saw in 2008.