U.S. Housing Market Will Withstand a Wave of Foreclosures When Forbearance Ends

Investors and first-time homebuyers will quickly buy up an impending wave of foreclosures from homeowners saddled with debt during the pandemic 

More than 3.3. million of U.S. homeowners will be on the hook for delinquent payments when mortgage forbearance ends. While some of those homeowners who are overleveraged or unaware of their options will contribute to a wave of foreclosures, most will be able to work with their lenders to either refinance their mortgage or sell to cash in on rising home values. American homeowners have gained $2 trillion dollars in home equity since the beginning of the pandemic alone, thanks to double-digit price growth driven by soaring homebuyer demand as the supply of homes for sale fell to historic lows. And an impending wave of foreclosed homes will only make a small dent in the inventory drought. First-time homebuyers and investors will likely quickly buy up any foreclosed homes, leaving the larger housing market unimpacted. While this is good news for the housing market and economy, it highlights a growing inequality between Americans who have suffered deeply during the pandemic recession and Americans who have been largely unaffected or have even become wealthier.

At the peak of the foreclosure crisis in 2010, the national average loan-to-value ratio was 94%,  meaning the average homeowner owed her lender nearly as much (94%) as the value of her home. As a result, many financially stressed homeowners couldn’t even afford to sell their home after paying agent fees of 6% and closing costs, so they often ended up in foreclosure. Currently the average loan-to-value ratio, among metros that report data, is 70%, meaning that the average homeowner has built 10% additional equity beyond an initial 20% down payment. 

Currently the metro with the highest loan-to-value ratio is Virginia Beach at 86.2%, but that is likely due to the high volume of low-downpayment mortgages for local veterans. But because military employment has been unaffected by the pandemic, just 0.3%  of homeowners say they are somewhat likely or very likely to be in foreclosure in the next two months, according to the Census Household Pulse Survey (see table below for data on each metro). The metro with the next highest loan-to-value is St. Louis at 78.1%, which is low enough that most homeowners could refinance their mortgage or sell to pay off delinquent mortgage payments. This explains why only 1.8% of St. Louis feel they are somewhat likely or very likely to face foreclosure, even as 9.2% of homeowners are not current on their mortgage payments. 

Las Vegas has the highest unemployment rate at 14.8%, but Las Vegas homeowners have plenty of equity with an average loan-to-value ratio of 67.9%. As a result, many Las Vegas homeowners are tapping their home equity and downsizing. New listings are up 6.9% from last year, but for every seller there are buyers moving in, which has kept the housing market strong — home sales are up 9.3% from last year. 

“I’ve worked with some people who are downsizing, finding something that fits their new budget,” said Redfin Las Vegas Agent Marco Di Pasqualucci. “Many have lost a job and aren’t sure if or when it’s going to come back. The common plan for these people is to take the equity out of their current home and rent something very affordable for a while. For some people, it’s a move for survival.”

Homeowners in forbearance have options to avoid foreclosure

Atlanta has the highest share of homeowners reporting they feel they are very or somewhat likely to face foreclosure in the next two months at 3.8%, and the fourth highest share of homeowners behind on mortgage payments at 13.5%.

“There was a misunderstanding in Atlanta for what the different options are for people in forbearance,” said Atlanta Redfin agent Ronisha Carson. “People didn’t know they could refinance, do a prorated monthly payment or tack it on to the end of their loan.” 

“In my experience selling foreclosed properties, some people don’t take advantage of forbearance because they aren’t educated on what it entails,” said Redfin agent Gina Sapnar. “There are people who are in forbearance who don’t understand how repayment works. For some people payments are tacked on to the end of the loan, but for others it may be a large payment due immediately at the end of forbearance as a lump sum, which could be very tough for people to repay. Some homeowners are underwater because they took on more debt than they could handle. I know of a restaurant owner who took equity out of his home to pay his workers during the pandemic. There are people suffering who have depleted their entire life savings, are drowning in debt and they aren’t paying their mortgages. But even those people have options. The lenders are really trying to work with occupants and educate them on how to avoid the scarlet letter of a foreclosure.”

Fannie Mae and Freddie Mac will allow borrowers in forbearance to defer repayment until the time the home is sold or refinanced. With record-low mortgage rates, homeowners behind on payments could theoretically refinance their mortgage debt into monthly payments lower than before the pandemic began. And if a borrower is in severe debt she may still be able to do a short sale or take advantage of cash-for-keys, where borrowers get a one-time payment to vacate their home.

Homebuyers and investors will snatch up foreclosed homes because of the shortage of homes for sale 

Even if there is a wave of foreclosures, those foreclosed properties will have little impact on the overall housing market because there is a shortage of homes for sale — the total number of homes for sale is at a record low.

“There are investors just waiting to buy distressed properties,” continued Sapnar. “I have one investor constantly reaching out, they are even looking for off-market homes because once a distressed home hits the market it gets multiple offers.”

And it’s not just investors who could benefit from a surge in foreclosures. Fannie Mae’s First Look program renovates distressed homes and offers them first to buyers who will occupy the home.

“The First Look program is great for first-time homebuyers who don’t want to compete with investors,” continued Sapnar.

Percent of Homeowners Deferring Mortgage Payments by Metro

Metro Average Loan to Value (LTV) Average Home Value Appreciation (Annualized) New Listings YoY Growth Median Sale Price YoY Growth Unemployment Rate Pct Homeowners Very or Somewhat Likely to Foreclose in the next two months Pct Homeowners with Household Income Loss Pct Homeowners Not Current on Mortgage Payments
Virginia Beach, VA 86.2% 17.3% 23.2% 12.8% 7.1% 0.3% 32.6% 6.4%
St. Louis, MO 78.1% 7.0% -28.9% 14.1% 5.5% 1.8% 36.2% 9.2%
Baltimore, MD 77.7% 18.8% 22.0% 14.3% 6.5% 0.6% 33.8% 10.5%
Pittsburgh, PA 76.8% 13.2% -0.8% 17.6% 7.8% 0.6% 41.3% 3.9%
Oklahoma City, OK 75.9% 9.7% 0.6% 18.1% 4.9% 1.3% 38.8% 7.5%
Columbus, OH 75.8% 10.2% 4.9% 16.3% 7.5% 1.5% 41.8% 8.1%
Cincinnati, OH 74.8% 10.4% 17.3% 19.2% 6.9% 1.5% 41.8% 8.1%
Washington, DC 74.8% 17.6% 35.7% 11.6% 6.7% 0.4% 33.1% 9.5%
Cleveland, OH 74.4% 11.7% 5.9% 12.7% 9.9% 1.5% 41.8% 8.1%
Minneapolis, MN 74.3% 12.5% 18.2% 12.5% 5.9% 0.4% 38.0% 6.6%
Denver, CO 73.6% 14.4% 19.7% 12.2% 6.5% 0.8% 41.6% 6.0%
Chicago, IL 73.1% 17.1% 14.4% 14.4% 10.5% 3.0% 40.6% 13.6%
Portland, OR 72.9% 11.9% 29.8% 10.6% 7.7% 0.7% 38.0% 4.2%
Nashville, TN 72.3% 12.2% -7.7% 12.0% 5.9% 1.3% 43.8% 12.5%
Warren, MI 72.2% 15.0% 0.6% 12.4% 9.8% 0.7% 47.0% 8.4%
Charlotte, NC 71.8% 13.3% -21.0% 14.2% 7.0% 0.8% 34.8% 8.7%
Sacramento, CA 71.8% 13.5% 32.8% 17.1% 8.9% 1.7% 45.9% 9.6%
Philadelphia, PA 71.3% 20.6% 14.4% 19.7% 7.9% 1.1% 46.4% 10.0%
Riverside, CA 71.3% 20.2% 10.7% 14.0% 10.4% 1.5% 50.0% 11.1%
San Diego, CA 71.3% 19.6% 15.5% 11.9% 9.0% 1.7% 45.9% 9.6%
Montgomery County, PA 70.9% 19.1% 22.2% 15.9% 7.9% 0.6% 41.3% 3.9%
Detroit, MI 70.5% 17.5% -5.4% 14.3% 9.8% 1.5% 52.1% 12.0%
Oakland, CA 70.1% 13.6% 41.4% 9.8% 8.6% 1.7% 45.9% 9.6%
Jacksonville, FL 69.6% 16.0% 0.9% 10.0% 5.1% 2.0% 46.1% 8.6%
Seattle, WA 69.6% 13.1% 37.8% 13.4% 7.4% 0.7% 39.9% 8.7%
Newark, NJ 69.2% 17.3% 25.6% 23.5% 9.5% 2.2% 45.0% 13.3%
Orlando, FL 68.1% 11.9% 0.5% 10.5% 9.8% 2.0% 46.1% 8.6%
Los Angeles, CA 68.0% 18.0% 25.1% 14.0% 13.6% 2.7% 49.2% 13.4%
Las Vegas, NV 67.9% 14.0% 6.9% 9.3% 14.8% 2.9% 51.0% 10.8%
Providence, RI 67.7% 18.7% 14.6% 15.5% 10.0% 2.5% 41.2% 14.8%
Atlanta, GA 67.3% 16.0% -1.2% 16.3% 6.7% 3.8% 37.5% 13.5%
Tampa, FL 66.5% 14.1% 6.6% 14.9% 6.1% 2.0% 46.1% 8.6%
New York, NY 66.2% 14.4% 40.6% 10.0% 9.5% 0.9% 45.9% 9.4%
Milwaukee, WI 65.8% 11.7% 13.6% 11.4% 6.0% 0.6% 34.1% 6.3%
Phoenix, AZ 64.3% 22.0% 10.8% 17.3% 6.3% 3.4% 40.2% 9.2%
San Jose, CA 64.2% 10.0% 48.6% 15.7% 7.1% 1.7% 45.9% 9.6%
Anaheim, CA 62.5% 17.6% 28.9% 12.0% 13.6% 1.7% 45.9% 9.6%
Fort Lauderdale, FL 61.1% 15.1% -2.5% 11.5% 10.1% 2.0% 46.1% 8.6%
Miami, FL 60.8% 13.5% -10.0% 12.9% 10.1% 2.3% 47.5% 15.4%
San Francisco, CA 56.6% 4.5% 40.5% 0.0% 8.6% 0.4% 40.3% 5.0%
West Palm Beach, FL 53.5% 14.1% -2.8% 19.3% 10.1% 2.0% 46.1% 8.6%
Boston, MA 52.6% 12.6% 17.2% 13.4% 9.2% 2.1% 42.5% 8.9%
Nassau County, NY 40.4% 16.3% 20.6% 15.2% 9.5% 0.6% 44.6% 7.9%
Austin, TX n/a n/a 12.6% 13.2% 6.4% 2.3% 40.6% 11.3%
Dallas, TX n/a n/a 0.4% 12.4% 7.5% 1.7% 44.7% 11.3%
Fort Worth, TX n/a n/a -4.5% 9.6% 7.5% 2.3% 40.6% 11.3%
Houston, TX n/a n/a 13.6% 10.9% 9.6% 1.3% 45.9% 8.8%
Indianapolis, IN n/a n/a 2.4% 15.8% 6.0% 2.9% 39.0% 10.9%
Kansas City, MO n/a n/a -37.4% 15.2% 4.9% 1.8% 36.2% 9.2%
San Antonio, TX n/a n/a -5.8% 11.6% 7.8% 2.3% 40.6% 11.3%

Sources: “Share Homeowners with Deferred Mortgage Payments” and “Share Homeowners with Household Income Loss” is from the 10/12/2020 Census Household Pulse survey on homeowners with a mortgage, “Unemployment Rate” is from the September  BLS report, “Average Loan to Value” is from 2020 county records, “Average Home Value Appreciation (Annualized)” is calculated from the Redfin estimate and public records of sales in 2020, “Home Price Volatility (Annual)” is from FHFA HPI through Q2 of 2020 and is the standard deviation of annual appreciation, “New Listings YoY Growth” and “Median Sale Price YoY Growth” is from MLS and county records as of October 2020.

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