There is a lot of talk going around about the upcoming real estate bubble popping, but is this all talk? Or is there something to it?
Without holding a crystal ball to tell you the future, here are my thoughts about what is coming in the future. First, I want to tell you that these are simply predictions based on my experience and speculations about what people, banks, and the federal government might do.
First, let's talk about what caused the last crash, and is this the same situation? No. By no means is this the same situation as 2008-2012. The previous market crash started because of predatory loan practices and junk loans. Banks offered a loan to individuals who couldn't afford them based on the premise that they could refinance before a big balloon payment was due. As you may have guessed, the refinance never happened for many people. Refinance options were not a possibility, but "bad loans" were now grouped with some good loans. The good loans then turned into junk loans because they were grouped into a package deal that the investor was left holding.
Banks gave out bad loans, made terrible decisions, lied about those decisions to investors, left investors holding their mess, and to top it all off; the American people bailed the banks out!
Let's answer the burning questions right away. Is the same thing happening now?
No. Thanks to the recession and many great people calling the banks out for their terrible decisions, the industry was given more guidelines to follow about better qualifying the individual for a home loan. It is more expensive to get a home loan the less qualified you are. With a higher barrier of entry, banks have been giving out better loans to more qualified people. So, if lending is better, what is going to cause real estate to crash this time?
The current speculation as to why the bubble will pop is because millions of people are currently in forbearance and are "unable to pay their mortgage." The reason for the quotes there is because the government doesn't know if you're unable to pay your mortgage or if you've been taking advantage of a solution they provided. There is nothing wrong with going into forbearance, and the government made that an option because there was no clear route out of the pandemic when they did.
Some people believe this will cause the real estate bubble to pop because they assume these people in the forbearance program will enter foreclosure and the bank will seize their home. That might have been the case if not for the government-mandated restructuring of the homeowner's home loan. The millions of people in the forbearance program are allowed to go to their bank, asking them to restructure their loan by adding the missed payments to the back of their loan. Restructuring could mean homeowners get into a new 30-year loan.
The government has given many ways out of the forbearance program, but that doesn't mean these solutions will work for everyone. Millions of people are still in the forbearance program, wondering how they will get out of their current situation. I am here to tell you that there are still a few ways out, even if you've lost your job and cannot qualify to restructure your loan.
Sell your home. One way out is to use the market increase to your advantage. Due to buyer demand, the price of homes are up across the country. I am willing to bet that your home has enough equity to get you out of trouble and still put some money in your pocket.
If you can still make your mortgage payment but can't qualify for a refinance, the government allows you to make a "COVID-19 Deferral Payment". The program will enable you to move the forbearance into "second position." Whenever you can refinance or sell the property, you must pay off the forbearance amount.
One thing to note about these options is that they are for government backed loans. If you do not have a government backed loan, you will need to call your loan service and speak to them about a solution. You can read more about the programs here.
So, banks caused the first crash, and everyone is talking about the forbearance program causing the second market crash. Is there any merit to this? The answer to this is where my speculation and market knowledge comes into the conspiracy realm.
I do not believe we are looking at another crash like 2008-2012, and I do not think we will see a significant slow down anytime soon. If anything, I think we will see an increase in purchases and homes hitting the market due to talks of increased mortgage rates. You can read about that here. With multiple options out of the forbearance program, I do not think the banks will get a flood of foreclosures. Sure, some homes will enter into foreclosure, but it won't be big numbers like some investors and young buyers are hoping. Plus, remember how the banks started the first crash? I know institutions don't always learn their lessons, but I think this time will be different.
During the last crash, the banks flooded the markets with homes, hoping to get some money back from the bad loans they produced. Pumping the market full of homes hurt them in the long run. So, why would banks do this again? They won't. Think about this: if the market is starving for homes, buyers wait to pounce on a home the minute it hits the market. And you have all the homes because you foreclosed on them. Why you flood the market? Banks will have all the power because they control the asset that people want. They can essentially control the market price by controlling the flow of homes that enter the space! With their past failures fresh in their minds and a very buyer-driven market, I think the banks are set up to make a ton of money if foreclosures happen.
If you thought home sellers were frustrating, wait till you have to purchase from a bank. The process is long, frustrating, and they have no reason to make you happy. They will be the market.
So, what should we do or hope for? Well, we should hope to have a slow down and adjustment of the market. interest rates could be a cause of this, or it could simply be buyers no longer wishing to punish themselves with constant bidding wars. We should hope to get back to a "neutral market", where buyers and sellers are on equal playing fields. This puts everyone in the position of negotiation and if everyone isn't happy they don't feel bad about walking away.
-Randall Watts
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