When the U.S. Centers for Disease Control and Prevention’s pandemic-related eviction moratorium was set to expire on July 31, media reports abounded, forecasting a wave of foreclosures and evictions that could result in an record housing crisis in the United States. Meanwhile, anxious renters and homeowners waited to see if they might soon become homeless, while multifamily property owners counted the days until they might be able to take action over months upon months of unpaid rents.
What will happen now that the moratoria is lifted in most of the U.S.? According to the Aspen Institute, more than 15 million Americans live in households owing $20 billion in back rent to their landlords. Will homelessness skyrocket even as most of the country still struggles to defeat the novel coronavirus? Data compiled by Cushman & Wakefield paints a far less dire picture, one where property owners are incented to remain patient, and a mass housing crisis will likely be avoided thanks to federal assistance.
According to Princeton’s Eviction Lab, evictions presently are 65% below pre-pandemic levels, while the Mortgage Bankers Association found both foreclosures and delinquencies also declined from early 2020 to early 2021. Of course, these numbers were influenced heavily by the moratoria, so both evictions and foreclosures are sure to increase. Cushman & Wakefield hypothesize that instead of crashing, the real estate market will be able to absorb much of the change.
Predictions for Single Family Properties Post-Foreclosure Moratorium
Presently, 2 million homeowners, 4% of first mortgage borrowers, are receiving help from loan accommodations. According to Cushman & Wakefield, that number represents the ceiling for potential post-moratorium foreclosures. In contrast, 3.8 million foreclosures took place during the financial crisis from 2007-2010, representing almost double the upper limit in 2021. It’s unlikely any pandemic-related foreclosures will ever near previous “crisis” levels, for multiple reasons.
First, banks are not in the real estate business – at least not by choice. It is usually not in their financial best interest to take possession of properties if foreclosure can be avoided with loan modifications and short sales. Further, while the moratorium only applies to government-backed mortgages, forbearance rates on loans serviced by independent mortgage brokers currently remain higher or only modestly lower than those serviced by Fannie Mae, Freddie Mac or Ginnie Mae. Based on that data, lenders aren’t accommodating homeowners in arrears based only on government mandates, and therefore it’s unlikely to result in a foreclosure cliff when the moratorium is lifted.
Single family residential property values around the nation have increased, and real estate remains a seller’s market as inventories of homes for sale are well below the demand. Because of these rising property values, far fewer homeowners are underwater on their mortgages. The Consumer Financial Protection Bureau estimates that only 1% of mortgage borrowers have loan-to-value ratios above 95%, and half of all borrowers have an LTV below 60%.
Borrowers with greater equity in their homes are offered more options to avoid foreclosure, and they can often refinance their loans, reducing their mortgage payments thanks to historically low interest rates. Likewise, if necessary they can more easily sell their homes. In fact, Cushman & Wakefield predicts that the number of borrowers in forbearance will likely continue to decline.
Predictions for Multifamily Properties Post-Eviction Moratorium
Predicting the result of a lifted eviction moratorium, on the other hand, is more complex. Based on a weekly survey of 70,000 households, the U.S. Census Bureau reported that as of July 2021, 7.4 million U.S. households were behind on rent – 16% of all rental households. Worse, 1.4 million people – 3% of all rental households – said they are “very likely” to be evicted in the next two months. An additional 5% said their chances of being evicted are “somewhat likely.” These numbers, however, paint an incomplete picture of the multifamily housing market.
According to Moody’s Analytics, the number of delinquent renters in the United States again decreased in June to 5.6 million comparted to 9.4 million in January. The discrepancy between the two studies could be the result of the Census Bureau’s small sample size, but the government data also has no pre-pandemic baseline to compare. How many households were behind on rent before the pandemic?
Fortunately, data from the National Multifamily Housing Council reaffirms that delinquency rates have been declining since their peak in early 2021. In fact, the NMHC data indicates that delinquencies now have recovered to pre-pandemic levels. Of those still behind on rent, the Census Bureau reports 73% earn less than $50,000 each year, narrowing the scope of what renters will be most impacted by lifting the eviction moratoria.
Relief is available for many of the households that remain behind on their rent, however. Federal emergency relief programs have designated $46.5 billion in rental assistance funds for tenants earning less than 80% of the median income in their area, which includes most delinquent households. These funds can be used to pay rent in arrears, as well as rental expenses for several upcoming months. Based on Moody’s Analytics’ calculations, the total amount of delinquent multifamily housing rents through June 2021 totaled about $24 billion, leaving ample extra emergency funds to cover all qualified renters.
The funds, however, have been rolled out slowly at both state and local levels. As of June, less than $3 billion in the emergency rental assistance funds have been awarded to renters, leaving multifamily property owners in a predicament as back rent continues to accumulate while they are unable to act and recoup rent payments or replace nonpaying tenants. It doesn’t help that only 40% of multifamily small-scale owners were even aware of the programs as of May.
Even as they wait for delinquent rents to be paid, multifamily property owners have reason to postpone eviction activity – even after the moratoria are lifted. The emergency relief funds ultimately will be awarded to delinquent renters, enabling them to catch up on their payments. To further predict future market resilience to impending multifamily evictions, Cushman & Wakefield developed a formula based on unemployment rates, the Census Bureau’s delinquency data and the firm’s own data concerning increased rent costs per square foot since February 2020, as well as its June 2021 Class C occupancy rates.
According to Cushman & Wakefield’s model, owners will of course have “renewed freedom of action” following the moratoriums’ lift, but if evictions increase and occupancies fall, rents will decline as a result. Further, if tenants are evicted, the property owners might never recoup the missed payments.
According to Moody’s data, the average rental delinquency equals about 2.9 months’ rent. A new 12-month rental contract would have to be 25% higher than its predecessor to accommodate for the lost months’ payments. The further behind an evicted renter was on their payments, the longer it will take the property owner to recoup the loss with a new tenant. Since the emergency aid eventually will be awarded, it makes sense then for owners to continue their patience.
When deciding their post-moratorium actions, multifamily property owners and operators should therefore consider the strength of their local labor markets, as well as the costs to acquire new tenants and recoup evicted tenants’ rent in arrears. Ultimately, Cushman & Wakefield predicts that reports of an impending eviction wave and housing crisis are strongly overrated.
“The end of the eviction and foreclosure moratoria will have little impact on the wide-ranging factors driving returns to multifamily investors,” the company’s report concluded. “The multifamily sector has several strong years of fundamentals ahead of it.”
