We estimate a backlog of around 850,000 foreclosures will have built-up if the ban is extended until the end of September, similar to the peak seen during the financial crisis. However, not all those foreclosures will be processed in the final quarter of the year, many will not lead to a forced sale and, in any event, with inventory so low the boost to supply will only help cool house price growth, not cause a crash.
Global State of Play, 28th January, 0800 GMT and 1600 GMT. In the first of our regular briefings of the year, Group Chief Economist Neil Shearing will lead a discussion about the economic impact of vaccination programmes, another US fiscal stimulus package and fresh lockdowns in China.
- We estimate a backlog of around 850,000 foreclosures will have built-up if the ban is extended until the end of September, similar to the peak seen during the financial crisis. However, not all those foreclosures will be processed in the final quarter of the year, many will not lead to a forced sale and, in any event, with inventory so low the boost to supply will only help cool house price growth, not cause a crash.
- President Biden plans to extend the ban on foreclosures, which first began in March last year, to September 2021. That will help stabilise the housing market during the pandemic, but, once the ban is lifted, there is a risk of a flood of foreclosures leading to a surge in forced sales and a corresponding drop in house prices.
- The good news is that the three main factors which drive mortgage delinquencies are not pointing to a large problem. Mortgage interest rates are at record lows, and we expect them to remain low. Surging house prices have driven up home equity, which provides an incentive for borrowers to keep up payments. And we expect a decline in the unemployment rate this year as the economy reopens. From 6.7% in December, the unemployment rate is set to fall to 4.5% by end-2021. On past form, that implies the mortgage delinquency rate will return to just above its pre-COVID level. (See Chart 1.) We therefore expect the majority of the 5.4% mortgages in forbearance will be able to avoid foreclosure. (See Update.)
- That said, there are always some mortgage delinquencies even under good conditions. And the foreclosure ban has protected those who would have been behind on their payments even in the absence of COVID-19. The foreclosure start rate prior to the pandemic was 0.21%, or around 100,000 mortgages a quarter. By September, that implies a backlog of 600,000 ‘normal’ foreclosures to work through. Assuming 10% of those in forbearance also eventually move to foreclosure, that gives a backlog of around 850,000.
- If all of those homes are foreclosed in the final quarter of this year, that would eclipse the worst period of the financial crisis. (See Chart 2.) However, we doubt this will trigger a house price crash. For one, the capacity of the court system means foreclosures will not all occur in the fourth quarter. And, even after the procedure starts, borrowers can still come to an arrangement with their bank and avoid a forced sale.
- Importantly, and in contrast to the run-up to the financial crisis, inventory today is at record lows. The market is therefore well-placed to absorb any rise in supply. Indeed, half of that backlog hitting the market in the final quarter of this year would only have boosted the months’ supply of all homes for sale to 3.2, which would still have been lower than at any time from 1982 to 2020 Q2. Accordingly, we see little risk of the foreclosure backlog triggering a house price crash. Rather, any extra supply will just help cool house price growth from around 10% y/y today to 3% by the end of the year.
Chart 1: Mortgage Delinquencies & Unemp. Rate (%)
Chart 2: Foreclosure Starts (000s)
Sources: Refnitiv, MBA, Capital Economics
Sources: MBA, Capital Economics
Matthew Pointon, Senior Property Economist, email@example.com