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Coronavirus Infects Housing: The New Housing Crash

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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.

The Coronavirus has significantly impacted the stock market leading to a loss of trillions in dollars and a stimulus bill of over $2 trillion. But what about the housing market? The Coronavirus has all but shut down most businesses, it seems like no market is safe. In this post I will address how the Coronavirus has affected the housing market, what the effects will entail, and if these effects will lead to a new housing crash.

Current Effects On Housing

Zillow and Redfin have halted buying houses. Furthermore, people are buying fewer houses due to the prospective of being laid off and other income shocks. Altogether housing market activity has slowed down. This alone would not create a new housing crash. If you feel like your house is going underwater, you may feel trapped because fewer people are willing to buy your house if even iBuyers are less willing to buy your house.

Not too many worries though. If you have a house, you could ask for forbearance if it is a Fannie Mae or Freddie Mac loan. After all, mortgage lenders can afford to go without income for a while (extreme sarcasm notice).

Mortgage Lenders Will Face Hard Times

While homeowners can delay payments on their mortgage there is no guarantee of what that may entail. Forbearance may look like a helpful tactic, but there are many downsides. If you try out forbearance, it is very likely you will still accrue interest. While the government is asking lenders to allow forbearance for a year I am yet to hear about how whether interest would still accrue. I think it is likely it still will even if it is lower. The forbearance is meant to ease people through the Coronavirus crisis not anything beyond that.

You may have to take on forbearance. Keep in mind that you may not pay anything into the mortgage temporarily, but you will have to pay in more later. However long you have taken on forbearance will shorten the term of your loan. Let’s say you have 15 year term loan, but you take on forbearance for a year the mortgage lender will treat the loan like it has a 14 year term. Furthermore, the difference in payments may be asked for straight forward after the 12 months. A foreclosure is possible.

How Forbearance Can Affect Servicers

This is fine for many mortgage lenders in small dosages, but if too many happen many non-bank mortgage servicers would have to pay for the principal that the borrower did not cover. That would make mortgage servicers be out billions of dollars.

Since real estate companies now have inventory in which is not being purchased and mortgage payments are likely not going to be fulfilled they will have a very tight pinch on their cash reserves. These companies will have lower income and likely higher expenses.

Foreclosures Are More Likely

If too many people go into forbearance without a solid plan to pay off the remainder of the mortgage in the future a foreclosure could happen. That could leave people without a home and add new homes to the market. As this happens, houses are likely to drop in prices. Some people who were relying on their home sales for income or retirement may be short of money. This may not be unlike the crash of 2008.

Mortgage Servicers May Face Issues

Mortgage servicers may have some relief, but it is questionable if they will have the relief come in their time of need or if it will be enough. Some of them may need to close shop. To be completely honest, I have no idea of exactly what will happen with this. When mortgage servicers become bankrupt the mortgage will be bought by someone or something else. Many government programs may have to pick up the bill. There is speculation that if these programs cannot pick up these bills they may close down. This could lead to repossessions of many houses and many people will be shut out from buying houses. Imagine a housing market with significantly less demand. That may make houses worth even less.

Final Thoughts

People are scared about what the Coronavirus crisis will do. This may even lead to a new housing crash. The government may offer plenty of temporary fixes for people who cannot make their mortgage. If too many people take these options then the government will have to bail them out. That would inevitably kick the can so taxpayers would pay later. If that does not happen, mortgage programs may be out of money and close. This may be the worst thing ever for home values or a great opportunity for other people, either way we could expect some rearrangements when it comes to housing.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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