“The United States may be facing the most severe housing crisis in its history.”
Combining vulnerable homeowners and renters, COVID-driven housing displacement threatens to exceed the GFC.
The following article was originally published in “What I Learned This Week” on August 13, 2020. To learn more about 13D’s investment research, please visit our website.
The above quote comes from an Aspen Institute report released recently by a coalition of housing researchers from institutions including Princeton, Wake Forest, MIT, and the University of Arizona. Their headline conclusion is heartbreaking: 30 to 40 million Americans are at risk of eviction this year, or roughly 29% to 43% of all renter households. And the pain will be widespread across the country:
If, when, and how Congress resolves its current stimulus deadlock will determine the speed and severity of housing pain. President Trump’s recent executive action was more political statement than meaningful measure, failing to give “tenants worried about losing their homes amid one of the worst public health crises in history any additional security,” according to CNBC interviews with experts. It also won’t protect the “mom and pop landlords” that own almost half of all rental units in the housing market and require rent payments to make their mortgage payments.
Roughly 30% of renter households nationwide report having used government aid or assistance to help pay rent since the pandemic began. Democrats and Republicans remain trillions of dollars apart on an aid package and as Bloomberg reported this week, Mitch McConnell is insisting that legal liability protections for businesses be included for any bill to pass the Senate. Democrats have suggested the provision is a poison pill. Even within the Republican majority, it’s not clear any consensus exists — reportedly, more than 50% of Republican senators are opposed to any additional stimulus at all.
As we explored in WILTW May 21, 2020, renters nationwide were already walking a financial tightrope before COVID-19. Roughly 50% of renter households in the U.S. were “cost burdened” or “severely cost-burdened”, meaning they paid anywhere from 30% to greater than 50% of their income on housing. The median rent for an unfurnished apartment in a new building in 2019 was $1,620, a 37% increase versus the median rent in 2000. Income growth has not kept pace with rent inflation:
Cracks were already growing in the rental market even before the CARES Act expired at the end of last month, ending the $600 in additional weekly unemployment benefits and the federal moratorium on evictions. The Census Bureau’s Household Pulse Survey for the week of July 16 to 21 found that roughly one in five renters was unable to pay July’s rent on time. Meanwhile, “the proportion of renters who used credit cards to make their payments was increasing,” as The Financial Times reported.
In states where eviction moratoriums have expired, evictions are already spiking. According to The New York Times, judges in Columbus, Ohio, have moved eviction proceedings to a convention center to accommodate huge numbers. In South Carolina, “the number of eviction notices filed in April jumped from 40 to more than 4,500 in May and over 6,000 in June, according to court records,” NBC News reported. In Milwaukee, Wisconsin, evictions were up 26% in June versus the same period last year. According to Stout Risius Ross estimates, more than 11.6 million evictions could be filed in the U.S. in the next four months.
Yet, it’s not just renters that are in peril. While the mortgage forbearance rate has dipped slightly from its April high, it still remained at 7.7% as of two weeks ago, up from less than 0.5% on March 8th. And homeowners in forbearance are making fewer and fewer payments. According to Black Knight Financial Services, 46% of borrowers who received a forbearance actually made a mortgage payment in April. By May, that number had fallen to 22%. And by June, it had reached 15%.
The high end of the residential market seems to be suffering the most, likely due to the fact that government aid is not enough to cover the expenses of higher-wage workers that have lost their jobs. According to Black Knight, 11.8% of all jumbo loans were in forbearance as of June 16, more than double the rate in April.
In May, mortgages 60 to 89 days overdue hit their highest level since at least 1999 (chart below). According to CoreLogic modelling, serious mortgage delinquency rates will quadruple over the next 18 to 24 months, putting three million borrowers at risk of losing their homes. By comparison, the GFC saw four million borrowers lose their homes. Given the homeownership rate has fallen by roughly 4% since the pre-GFC peak, that number should come as cold comfort. Combining vulnerable homeowners and renters, COVID-driven housing displacement threatens to exceed the GFC.
A housing crisis would depress real estate values and threaten a banking crisis. Yet, the social implications may be even more severe. For one, at a time when racial tensions are boiling, communities of color are disproportionately at risk of eviction (chart below). Before COVID, 80% of people facing eviction in the U.S. were black or latino. Now, COVID-driven job losses have disproportionately affected people of color. As of April, 61% of Hispanic Americans and 44% of black Americans said that they, or someone in their household, had experienced a job or wage loss due to the coronavirus outbreak, which compared to 38% for white Americans. In Boston alone, 78% of eviction filings since the beginning of the pandemic have been in communities of color.
The political implications are also seismic. As COVID ravages the south, Republican strongholds now appear acutely vulnerable to a housing calamity. As Politico reported this week, 1.7 million rental households in Texas have now failed to pay rent and are at risk of eviction. In Florida, that number is at 1.1 million. And in Mississippi, West Virginia, Louisiana, and South Carolina, between 48% and 58% of renter households are at risk. If the federal government fails to bail out renters, will voters in the south hold Trump responsible in November and flip states he can ill-afford to lose?
Talking to CNN last week, Wake Forest law professor Emily Benfer, a co-author of the Aspen Institute report, summed up what’s at stake:
The data demonstrates the gravity of this situation cannot be overstressed. Unless the federal government invests in eviction prevention, we are not only risking widespread eviction and homelessness, we are guaranteeing negative health outcomes, greater unemployment, educational decline, and long-term harm for renters, property owners and communities.
The following article was originally published in “What I Learned This Week” on August 13, 2020. To learn more about 13D’s investment research, please visit our website.
