Foreclosures likely to follow housing boom

The housing market is booming. Is this another indication that the recovery from the Pandemic Recession is complete for the rich, while low-income households are left behind? No, it isn’t. It’s primarily driven by the usual suspects in any market: supply and demand. But serious challenges are looming for low-income homeowners. Expect a wave of foreclosures in 2021.
A slew of recent data shows that in the US, housing is going gangbusters. Sales of existing homes increased by 9.4% in September to 6.6 million units on an annual basis, its highest level since May 2006. The median existing-home price was 14.8% higher than in September 2019.
New-home sales slipped in September relative to August, but are up 32.1% over the year. Seven in 10 homes sold in September were on the market for less than one month. In 20 metropolitan areas — including Phoenix, Seattle and San Diego — home prices rose more in August than in any month in the past two years. The AEI Housing Center’s Home Price Appreciation Index shows 8.6% annual gains in September, up from 5% in September 2019.
All told, housing could be one of the few sectors of the US economy to make a positive contribution to overall economic growth this year.
Why? These impressive gains are not driven primarily by a “K-shaped” recovery from the Pandemic Recession, in which high-income households are seeing gains while lower-income households continue to struggle. Instead, the main reason housing is doing so well is the combination of strong housing demand and limited supply, both of which have roots that predate the onset of the pandemic.
Let’s start with demand. Going into the pandemic, the market was very tight: 1.1% of owner-occupied housing was vacant and for sale in the first quarter of 2020, lower than it had been in three decades. The rate has continued to drop, hitting 0.9% in the third quarter of this year. The rental vacancy rate has been very low as well.
Low mortgage rates have fuelled demand. The housing sector is relatively sensitive to interest rates, and mortgage costs — already low before the pandemic began — are at rock bottom, driven to current lows by the Federal Reserve’s rate cuts and asset purchases. As of October 22, the average 30-year fixed-rate mortgage was 2.8%, down from 3.75% a year before. Fifteen-year fixed-rate mortgages have been below 2.75% since the beginning of May.
The pandemic likely has affected the timing of demand. Housing starts and sales of new and existing homes were lower in the spring and summer than they were at the beginning of the year, giving the market a short-term boost this fall from pent-up demand.

—Bloomberg