This time is different. We’ve heard that time and time again, as industry experts dismiss the idea that a wave of foreclosures is on the horizon, similar to what occurred during the Great Recession.
In many ways, they are right. With household equity at a near three-decade high, American homeowners are actually in a better position to navigate this economic crisis, allowing them the option of selling or refinancing to weather the economic storm.
According to a recent analysis by First American, that equity cushion is what’s keeping homeowners afloat right now, as they grapple with the highest recorded unemployment rates in the post-World War II era.
“Alone, economic hardship and a lack of equity are each necessary, but not sufficient to trigger a foreclosure,” said First American Deputy Chief Economist Odeta Kushi in the report. “It is only when both conditions exist that a foreclosure becomes a likely outcome.”
But a new study out from First American shows that there might be a third trigger this time: COVID-19.
After states began reopening in late May, a resurgence of the virus in the southern half of the U.S. and subsequent shutdowns in July led to increased economic distress, with higher percentages of homeowners in southern states less certain of their ability to make their mortgage payment on time, said the report.
“The percentage of economically distressed homeowner households is highest in COVID-19 hotspots, like Houston and Miami, where a resurgence of the virus has hindered economic activity,” Kushi said in the report.
In mid-July, 34% of Houston homeowner households reported that they had no or low confidence of making their next mortgage payment or would defer payment. In Miami, 31% of homeowner households said the same.
During the same time frame, 19.67% of Chicago homeowners predicted they would have trouble making their next mortgage payment or planned to defer payment.
Just as the pandemic has impacted some states more than others, it has also impacted some industries more than others, which is putting additional burden on these markets.
Not surprisingly, tourism in Florida was down 60% year over year in the second quarter, leading to significant job loss. In Miami, jobs in the leisure and hospitality sector shrunk 30% in the second quarter compared to the same time last year.
Houston, on the other hand, has seen recovery in its leisure and hospitality sector, but is still grappling with job losses in the mining and logging sector. While the downturn in oil prices is unrelated to COVID-19, the double whammy is creating further economic distress for the city.
Whether the economic distress in some of these markets leads to a large number of foreclosures remains to be seen, but economists say home equity may turn out to be the silver lining.
According to the report, even markets with the highest percentage of distressed homeowners — Houston and Miami — have median debt burdens below the national level.
During the Great Recession, high levels of housing debt combined with falling home prices led to a tsunami of foreclosures, but both the housing market and American households are in a stronger position compared to a decade ago, with household debt-to-income ratio currently at a four-decade low.
“Homeowners have historically low levels of debt burden nationally, providing an equity cushion in this period of uncertainty,” Kushi added. “The equity built up since the Great Recession can provide an important buffer for distressed homeowners.”