The Truth About the COVID-19 Housing ‘Crisis’

When you hear the words “housing crisis,” you probably think of the massive United States foreclosure tsunami and subsequent global financial meltdown that happened in the mid-2000s. That housing crash resulted in the Great Recession, which officially lasted from December 2007 to June 2009, and the global recession that followed. In fact, although the Great Recession officially ended in the United States in 2009, many European countries struggled between 2010 and 2014, and it was not until 2015 that the U.S. jobs market recovered to pre-recession levels. This extended and diverse fallout played a huge role in the subsequent and record-setting economic expansion that the country enjoyed until the advent of the COVID-19 pandemic on American soil.

Keep reading; this mini history lesson is important. It shows that our country has spent the last two decades (maybe even more) essentially obsessed with housing. Prior to the housing crash, there was an insane housing boom based largely on retail buyers’ speculation on their own homes and personal mortgage and mortgage lenders’ speculation on the federal government’s determination to prop up the housing market as least long enough for lenders make absolutely idiotic loans to people who could never afford to make their monthly payments. As a result of that housing boom (during which fortunes were made by many savvy real estate investors), the subsequent crash, and the ensuing economic recovery and expansion, the entire country remained laser-focused on the housing market. After all, we tend to mainly focus on the most recent disaster, and it has led to a weird, housing-centric mindset in the United States that leads even the most seasoned economists to insist, in many cases, that ever economic correction and cycle is a housing “crisis” – even the current public-health related one.

For real estate investors, the next economic correction tends to be something looked upon as an opportunity rather than a disaster to be weathered. The next housing “crisis” simply sets up the environment in which a real estate investor must be prepared to act in order to build up a portfolio and generate returns during the inevitable housing upswing or economic expansion that will follow the period of stress and tension in the market. However, public insistence on calling everything a housing “crisis” is creating false market conditions. This is the true crisis that the country is dealing with today.

What is the COVID-19 Housing Crisis Anyway?

Having set the stage for the discussion with a brief synopsis of the last 20 years in housing, the COVID-19 housing crisis now takes center stage. Here are some facts about the current state of the U.S. housing market:

• As of mid-May, renters owed a cumulative (and estimated) $8.4 billion-$52.6 billion in back rent.
• As of mid-May, one in 20 home loans was delinquent, including loans in forbearance.
• As of mid-May, just under 10 million people in the United States remained unemployed.
• As of mid-May, median home prices in the United States had risen 17 percent year-over-year.
• According to a Freddie Mac analysis published in April 2021, the U.S. housing inventory was short about 4 million homes.
• According to ATTOM Data Solutions data from Spring 2021, home prices are rising faster than rent prices in just over half of the country.

All in all, these facts sound nothing like the housing crash with which most readers and real estate investors will be familiar. Although the shortage of inventory and rising home prices might lead some analysts to suspect the formation of a housing bubble, the bigger issue is that there is not enough affordable housing inventory on the market.

The term “affordable housing” has changed over the years. Once used as a vernacular reference to subsidized housing, today, the term describes housing available to a household earning the median income for a local area. This housing sector is rapidly diminishing in many metro areas – particularly those that have temperate climates or were already “hot” markets prior to the pandemic. For example, Los Angeles and surrounding counties, New York, and Nashville and surrounding counties are not only suffering from a dearth of affordable housing; they are suffering from a dearth of profitable rentals as well. These three markets offer the lowest returns in the country at present. The affordable housing “crisis,” also now being referred to as the COVID-19 housing crisis because so many Americans swarmed into suburban areas and snatched up any single-family properties available, is taking a toll on real estate investors and landlords as well as would-be homebuyers.

When Will the COVID-19 Housing Crisis Really Hit?

It’s hard to predict when the COVID-19 housing crisis will really hit because everyone defines it differently. To housing advocates, the crisis is here because housing is becoming increasingly “inaccessible” (meaning it does not meet the definition of affordability) for the average would-be homebuyer. For homeowners, the crisis would be when the bubble bursts, if we are, indeed, in the middle of a housing bubble. For lenders, the crisis is potentially nearing a close if the federal government really permits foreclosure forbearance and eviction bans to expire this fall. For landlords, the crisis could be ongoing since most do not qualify for pandemic-related financial assistance, pandemic-related forbearance on mortgages going unpaid because rents are going unpaid, or pandemic-related eviction bans (since tenants cannot be evicted in most cases but landlords can certainly be dispossessed).

Most real estate investors will be best served by looking carefully at the current housing market in light of their preferred investment strategies and reacting accordingly. If you are able to wholesale or flip single-family residential homes at this time (meaning you have access to both leads and buyers) and are able to work quickly, then the time to act may be now before inventory loosens up. On the other hand, you run the risk of getting “stuck” with properties if the crunch eases sooner than you expect. Ifun you are a landlord you may wish to evaluate the market extremely carefully, investigating how many tenants are paying rents reliably and what rights you have when it comes to collecting that rent or enforcing an eviction if necessary.

Of course, savvy investors will also consider the “traditional” side of this equation: the homeowners who may respond to the idea that a crash is coming on an emotional level rather than an objective one. Frank Nothaft, CoreLogic’s chief economist, observed in April that the general mindset of the American homeowner was causing him some concern. “I have to admit I’m worried when I hear that [the term ‘How much over asking price should I offer on a home in 2021’ rose 350 percent the first week in April],” he said. “That mindset…means it’s an auction market.”

Investors will do well to keep a level head in the coming months. A market where emotions are high and bidding is wild is not the time for acquisitions. The correctional phase when the “auction market” ends will be the time for real estate investors to act.