Andrew Schnissel, Partner at Nationwide Private Lender We Lend LLC,examines the most essential factors for investors in the post-moratorium foreclosure landscape.
July 31, 2021, marked one of the most significant dates in recent history for the real estate industry and the wider housing market: It was the expiration date of the national foreclosure moratorium. Approximately 1.8 million homeowners relied on the foreclosure moratorium to stay in their homes, so some market dynamics may shift over the medium term.
But, in order to understand what the lifting of the foreclosure moratorium means for the real estate industry, it’s vital to first understand these three key factors.
Many Homeowners Will Have the Option to Sell
The fact that we’re on the cusp of a significant volume of foreclosures during a housing market bull run is unprecedented.
Between 2008 and 2010, during the aftermath of the financial crisis, 3.8 million homes were foreclosed — but any similarities between then and now abruptly end here. The housing market crashed in 2008 and the unemployment rate took years to recover, but that is not the case today.
Many homeowners who found themselves underwater in the aftermath of the financial crisis the pandemic didn’t have the option to sell. The collapse in home values meant that they were stuck with mortgages that were worth more than their homes. In contrast, the real estate market in 2021 is very different: A recent study by CoreLogic found that mortgage holders have increased their home equity by an average of 20% since Q1 2020.
Consequently, there’s a good possibility that, once banks initiate foreclosure proceedings, many homeowners who are behind on their repayments will have the option to sell at a price that will cover the payoff and could even provide said homeowners with a decent profit. As such, we could see a lot of motivated sellers enter the market in the short to medium term in order to avoid foreclosure, as well as to cash in while the real estate market is strong.
Investors Will Have an Impact
Unlike in 2008, banks and lenders aren’t going to be desperately trying to offload loss-making properties from their balance sheets to whomever will buy them. For the most part, these properties will represent good margins for investors — no matter their exit strategy. This will be a boon for both fix-and-flippers, as well as institutional investors — such as hedge funds, which are actively acquiring residential properties.
Institutional investors, in particular, have been steadily buying up portfolios of single-family properties across the country throughout the last decade and then putting them onto the rental market. So, if institutional investors make a big play at acquiring foreclosures as they hit the market, this inventory will shift to become rental properties for lease.
The Effect on Home Values Could Be Smaller Than Assumed
According to Zillow, the average home value rose 13.2% in the last 12 months — the highest annual increase since its records began in 1996 — and lack of inventory is a key factor in driving this growth. Therefore, some expect that the increase in supply from the lifting of the foreclosure moratorium — particularly properties that will come onto the market either via foreclosure or short sale — will help ease the high price of real estate.
However, the effect could be less than some assume. According to estimates from the National Association of Realtors, there’s also a shortage of 5 million units relative to demand. Notably, this shortage far exceeds the 1.8 million homes (of all classes) that are in delinquency, many of which will avoid foreclosure through loan modifications with their lenders.
The bottom line is that, with the expiration of the foreclosure moratorium, more investor-friendly residential inventory will enter the market in the short to medium term. As a result, this uptick of distressed residential assets entering the market will provide opportunities for all types of investors to acquire new deals — and only time will tell exactly how specific market dynamics will play out.
We Lend LLC is a New York-based, hard-money lender focused on serving real estate investors by providing quick and low-cost capital.