The Covid-19 Crisis and Rental Delinquencies
Rental delinquencies have become a major problem during the COVID-19 crisis. Delinquencies put renters at risk of losing their homes, and landlords at risk of failing to service their mortgages.
Take a look at what the government is doing to intervene, along with statistics and expectations for the weeks and months ahead.
Did President Trump Stop Evictions?
A federal eviction moratorium was enforced up until the end of July. However, the protections are no longer enforceable.
President Trump announced earlier this month that he was stopping evictions through an executive order. However, the wording of his order only directs the government to research whether a moratorium is necessary. Currently, renters don’t have federal protection enforceable by the courts.
According to a whitepaper published by academic figures from various public groups and universities , America could be facing an eviction crisis with up to 40 million people at risk. The social impact of this would be huge, with families and individuals losing their homes. Low-income earners are the most at risk, especially those who reside in apartments and similar dwellings.
Of course, missed rent payments are not just a problem for the renters. Property owners lose income, and if they are renting mortgaged properties, they risk not being able to cover their mortgages. According to the whitepaper, 65% of properties with up to 4 units and 61% of properties with up to 19 units are mortgaged.
Delinquent rent can lead to delinquent mortgages, compromising the entire mortgage and housing market.
Some States May Act Independently
States could act independently to protect renters during the COVID-19 crisis. Kentucky has already done this with its Healthy at Home Eviction Relief Fund. Announced by Governor Andy Beshear on Monday, August 25, 2020, this executive order ensures two key provisions for renters.
- Renters are entitled to 30-days notice when a landlord intends to begin eviction proceedings.
- During the 30-days, the landlord and tenant are required to meet and attempt to make payment arrangements.
- Landlords cannot add late fees, penalties, or interest to delinquent payments, dating back to March 6.
Other states could follow Kentucky’s lead, especially considering that Congress has stalled with its effort to provide a second round of Coronavirus relief.
How Bad is Rent Delinquency Today?
The statistics often show a different side of the story when compared to the news headlines. The National Multifamily Housing Council (NMHC) collects data from around 11.5 million apartment units each month to report in its rent payment tracker .
Here’s what the data says about payments made by rental households over the last five months.
- 2% made payments in April compared to 93.3% last year.
- 8% made payments in May compared to 93.0% last year.
- 2% made payments in June compared to 92.2% last year.
- 3% made payments in July compared to 93.4% last year.
- 0% made payments in August, compared to 92.1% last year.
Aside from June, the data shows that there has been a notable decline in rental payments made. Looking at the trend, it’s likely that payments in June could be down as much as 2% compared to 2019.
How Long Will It Take for the Market to Stabilize?
With the COVID-19 crisis uncontained in the United States, it’s impossible to predict just when the rental delinquencies will stabilize. A repeat of widespread economic shutdowns appears unlikely under the current administration. The job market lost 22 million jobs in March and April, but 9 million were added back in the past three months. 16 million people remained unemployed in July , and 8 million people were working part-time after working full time before the pandemic.
Rental delinquencies are linked to economic performance and employment figures. Lenders and landlords are likely to see a noticeable reduction in delinquencies as the economy recovers.
CMBS Loans and Mortgage Market Performance During the Coronavirus Pandemic
State lockdowns earlier this year and high unemployment figures have affected the home market in the United States. CMBS loans (Commercial mortgage-backed security loans) and even conventional loans backed by Freddie Mac and other organizations are at risk.
Delinquencies are likely to increase, at least according to some experts. The most bearish of analysts have warned that the U.S. market for commercial loans is close to collapsing.
Take a look at the latest facts and data that can help to gauge the market today.
Why Has the Market Stalled?
Liquidity is the biggest problem in the mortgage market today. The COVID-19 health crisis has made it difficult for American businesses to get access to liquidity. This has a knock-on effect of reducing their ability to pay employee wages and benefits.
According to a whitepaper post from Thomas J. Barrack , a prominent equity real estate investor, “The profound impacts of both the COVID-19 pandemic and the public health measures taken in response to it on the American economy have caused high-performing mortgage loans, grounded in solid economic fundamentals, to suddenly and sharply decline in value.”
As a solution, Barrack suggests that REITs, banks, and debt funds must develop a solution that allows flexibility for borrowers so that millions of jobs and the value of the industry can be protected. Repurchasing finance could be an essential element of any strategy implemented in the coming weeks and months.
Today, many borrowers who would have been engaged in the market prior to COVID-19 are now sitting on the sidelines. Even those that can afford to borrow may be unwilling to take risks with the economy underperforming and GDP set to produce its biggest slide in years.
How Mortgage Market Companies are Responding
The larger mortgage corporations understand the fragile position of the market, and they are making changes to ensure that lenders and borrowers are protected. A mortgage market crash would slow economic recovery and cause significant hardship for individuals and businesses.
Freddie Mac, one of the largest secondary mortgage companies in America, has implemented various changes to ensure stability. It has posted regular bulletin updates with temporary provisions to support the market during the COVID-19 crisis.
One of its most recent bulletins includes a change that requires self-employed borrowers to verify that their business is open and operating within 20 days of the note date. This was previously set at 10 days but was extended to provide relief for borrowers and mortgage sellers. This is just a single example of how mortgage market companies are trying to stimulate activity in the sector .
The government also funded extensive protections for homeowners earlier this year. FHA, VA, HSDA, Fannie Mae, and Freddie Mac secured loans were eligible for forbearance and mortgage relief.
Under the CARES Act, lenders and loan servicers have been forbidden from foreclosing until after August 31. Borrowers experiencing financial hardship related to the Coronavirus Pandemic have the right to apply for forbearance for up to 180 days, with the option for an extension of up to 360 days.
Fees, penalties, and additional interest are forbidden under the forbearance program, but borrowers must apply through their lenders. Full details were published by the Consumer Financial Protection Bureau earlier this year .
What Happens Moving Forward?
Congress failed to agree on a second round of stimulus, leaving many borrowers concerned about mortgage relief programs while the COVID-19 crisis still impacts the nation. While lenders are offering some flexibility for commercial and residential loans, there’s now little legislative protection for borrowers to fall back on.
Ultimately, the resilience of the market is likely to rely entirely on how long the economic recession lasts, and how quickly Congress can enact new policies to support the mortgage market.
Mortgage Forbearance During the COVID-19 Crisis
When the COVID-19 crisis broke out in the United States earlier this year, the federal government acted quickly to reassure families and businesses that the economy would be protected.
Almost six months after President Trump declared the Coronavirus to be a national emergency, the economy is in a recession and the home and mortgage markets are on shaky ground.
Federal efforts to protect the economy have mitigated the damage, but some of the most important programs are set to expire. Government-enforced forbearance programs are coming to an end, and this is what could change in the coming weeks…
Mortgage Forbearance Program Expires on August 31st
The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed into law on March 27, 2020. Designed to provide sweeping relief and stimulus measures to the American economy, it featured some special inclusions for homeowners.
People with FHA, VA, USDA, Fannie Mae, and Freddie Mac loans were able to take advantage of a forbearance or mortgage relief program .
People affected by the COVID-19 crisis (whether through health problems or economic hardship) could ask their lender to allow up to 180 days of forbearance with reduced or delayed mortgage payments. Within the initial 180 days, homeowners could apply for an extension of an equal period, taking the total forbearance up to 360 days.
Homeowners can still apply for the program, but it will expire on August 31st. Some lenders may not have the resources to process a forbearance application between now and that time.
This creates a challenge for people who are still out of work and unable to pay their mortgages.
The House of Representatives attempted to pass a new law to replace the CARES Act, but it met resistance in the Senate and the Executive Office. Known as the HEROES Act, it would have extended unemployment benefits of $600 per week for people who lost their jobs during the pandemic.
Because the act never became law, it was superseded by Presidential executive order, allocating federal unemployment benefits of up to $300 per week for eligible people.
Without an extension to the forbearance program, and with smaller unemployment benefits, America could soon face a mortgage crisis… at least, that’s what many people expect. However, the data tells another story.
Forbearance Numbers Not as High as Anticipated
According to data reported by Black Knight research , forbearances are now below 4 million for the first time since April. In the second week of August, the number of mortgages actively under a forbearance program decreased by 71,000.
This leaves just 7.4% of all mortgage loans in forbearance. That’s 3.9 million out of a total of 53 million active mortgages.
Foreclosures and evictions will soon resume, but there’s hope that the relatively low number of people seeking mortgage assistance means that the risk of widespread foreclosures is low.
Will Politicians Push for More Forbearance Flexibility?
With Congress failing to reach a bipartisan agreement on a second round of Coronavirus stimulus, it seems unlikely that the federal government will mandate any new forbearance programs in the short term.
This could soon change however, with the Presidential election coming up, both parties will likely reveal new policies aimed at attracting American voters.
As it stands today, homeowners can request forbearance from their lender up until August 31, after which any payment agreements will need to be negotiated without the benefit of a Federally enforced program in place.
The Current Status of Unemployment Benefits and the Impact on the Rental Market
On July 25th, funding for the federal government’s $600 weekly benefit lapsed, leaving millions of unemployed Americans without a subsidy on top of state payments.
The Democratic-majority House of Representatives passed a bill ensuring that the $600 benefit would continue, but it was met with resistance from the Republican-majority Senate and the White House.
Instead, President Trump offered a $300 federal subsidy through an executive order, although eligibility is not as widespread as the earlier benefit. Learn how the benefit works today, and what it means for renters and the wider home market.
Benefit Payments Depend on State Involvement
Under the executive order, states will only be eligible for a federal subsidy if they contribute $100 to the weekly payment. For the unemployed to be eligible, they need to already receive at least $100 of subsidies from the state government.
This leaves many people unable to receive the federal subsidy. According to some states, the disparity is significant.
In Texas, up to 350,000 unemployed citizens won’t be eligible for the $300 benefit. These same people would have been eligible under the previous $600 weekly benefit backed by Congress.
States must apply to receive the additional funding, which will be administered by FEMA (Federal Emergency Management Agency). Up to 30 states have already applied. The states need to demonstrate that they have the infrastructure in place to disperse payments.
The $300 in federal funding is seen as a compromise. Many Republican lawmakers were initially opposed to extending the $600 benefit, claiming that it disincentivized people from looking for work.
However, some academics dispute the assumption. In a July report published by Yale University , researchers found that people receiving the generous $600 weekly benefit had “returned to their previous jobs over time at similar rates as others. We find no evidence that more generous benefits disincentivized work.”
It should be noted that even as some workers received more in federal subsidies than their previous salaries, they lost out on benefits like insurance subsidies, retirement programs, and even non-financial benefits like the opportunity for professional development.
Will Low-Income Earners Return to Work Now That Federal Subsidies are Reduced?
We can see from the most recent unemployment data that people are returning to work. This was happening before President Trump announced the $300 federal subsidy in his executive order.
As state lockdowns have eased, companies have reopened for business, and around 9.3 million of the 22 million jobs lost earlier this year have been returned to the economy, according to data from the Bureau of Labor Statistics .
Most of that figure came back to the economy in June.
Job Numbers and the Real Estate Market
With jobs returning to the economy, the home market has shown some signs of recovery.
- 90% of professionally managed rental households have paid rent (in part or whole) so far in August. 70% of independently managed rental households have done the same .
- 2% of mortgages are engaged in relief programs, a decline of 1.35% since June.
- Existing home sales increased by 24.7% from June to July but are down 21.1% annually .
The mixed results reflect the fragile nature of the market today. The COVID-19 crisis has hurt the economy, and it could take years to recover. As jobs return, households will become more confident with spending, and rent delinquencies should decline.
Home buying activity is clearly starting to recover, which is good news for the wider market, including the mortgage market.
When the Coronavirus was first identified and people across the US were required to stay home, there were concerns about how this would affect the housing market. What has happened to the multifamily market, and how has it compared to other asset classes in the country?
Fears Around Multifamily Homes and Coronavirus
When the call to stay home went into effect, this made many developers and landlords nervous. If people were being furloughed or laid off from their jobs, there was a fear that many of them were going to be unable to make mortgage and rent payments. As the situation is so unprecedented in modern times, no one was sure how this was going to play out.
The Effect of Coronavirus on The Multifamily Market
So far, there doesn’t actually seem to be much of a dip in rental payments over the course of the lock down. In April, 84% of renters managed to pay all or part of their rent by the 12th of the month. This is much more than some were predicting, even as many were losing income. In fact, the amount renters making payments is on average the same as this time last year.
This is encouraging news for those in the industry, as it shows that payments are still being made even as the situation is still uncertain. As payments are being processed, multifamily homes are seen as one of the most stable markets right now.
The Effect on The Purchase Market
What is the consensus opinion on how the Coronavirus will affect the purchase market? This is where it appears to be having an impact. Many are finding that with the virus still present, they cannot access the funding to buy their own home so they will need to continue to rent.
This has caused major problems for buyers, because as of now, there is no indication of when the virus will be totally under control. Until then, lenders are placing stricter guidelines on who they can lend too, and how much they can lend out. This will keep them safe for the time being but will tarnish the short-term market. You can expect to see a downturn in profits from mortgage lenders.
It’s not surprising to see that multifamily markets are mostly stable, despite what was predicted. With it being much harder to now buy property, renters are staying put where they are. As the virus stabilizes, they’ll need to stay where they are and wait for lenders to be more willing to help them buy property again.
There’s no denying that people across the US are facing a housing crisis. As a renter, you may well find yourself paying 30% or more of your income just to keep a roof above your head. If you’re looking to buy a home, you’ll see that house prices are rising at twice the rate of wage growth. Just how bad is the housing crisis, and what can be done about it?
Buying Vs. Renting
Ask any renter, and they will tell you that they would love to own their own home someday. The problem is that it’s almost impossible for them to afford a home. In recent studies, a person working 40 hours a week at minimum wage cannot afford a two bedroom home anywhere in the country.
This causes problems, as affordable housing currently favors buyers over renters. You can see this in tax deductions, as they essentially subsidize middle- and upper-class homes, rather than affordable homes. It’s taken the ability to afford a home out of reach of millions of people in the country.
It’s not just the cost of buying housing that has gone up. To build those homes, the cost of materials has gone up too. Right now, lumber alone makes up 5 to 10% of the cost of building a home. With these costs rising, it’s getting harder to build affordable housing.
Restrictive Zoning Laws
Zoning laws have created a lot of problems for those trying to create affordable housing. In some areas, such as Los Angeles and San Francisco, put limits on what can be built. These can include limits on how high buildings can go, requiring a certain amount of parking spaces, and so on. These limits have come into place and have restricted developers in their opportunities to create new housing.
What Can Be Done?
There are certainly ways in which the housing crisis can be turned around. Inclusionary zoning laws have been brought into places like New York, allowing for more affordable housing to be built. With more existing properties being turned into affordable housing, this will increase demand too. With around 7.2 million affordable homes being needed across the US, it remains to be seen whether this will help with demand.
It’s clear that many factors have lead to the US housing crisis. If changes are made in how affordable housing is built though, these problems can be mitigated.
There are many developers who are looking to transform older buildings into affordable housing, and this brings a lot of benefits. As the homes are built into existing buildings, they’re much cheaper to develop. They don’t require planning and building from the ground up, and they can be completed much quicker. Here’s how you can do this too with an existing apartment community.
Depending on your location in the country, you may be eligible for grants and loans to help you achieve this goal. For example, in Denver, Colorado, a $10 billion Revolving Affordable Housing Loan Fund has been launched. This gives developers access to funds they didn’t have before, so they can revitalize older buildings.
Maintaining Historic Status
The great thing about revitalizing older buildings is that they get to stay in the community, rather than being destroyed to make way for new homes. Buildings like older churches and schools are commonly turned into housing, giving them new purpose. If you do this, you’ll need to be sure that you’re maintaining and preserving the historic nature of the site as you convert it.
A Modern Equivalent to Single Room Occupancy
Single room occupancy homes were popular in the past, but restrictions on building them have made these homes much harder to come by. Converting existing apartment buildings into something similar means the concept is coming back, in a new and modern way. Buildings are adapted to suit modern building codes, and the people in the community have access to affordable housing.
Benefits of Converting Apartments
There are so many benefits to adapting an existing building, such as apartments, into affordable housing. It’s a boon to the community, as the housing is available faster, and gives them a great option for lower income housing. For you as the developer, you’ll see there’s lots of incentives and opportunities to build in your city.
Converting an older building into affordable housing is easier than you’d think and makes a lot of sense. You can get funding for it, so you can create housing that the community needs.
There is no denying that Multifamily Investments will pay off in the long run. As they offer steady payments over time, you’ll seen that return sooner rather than later. If you want to diversify your investments though, what else should you be looking into?
The Benefits of Multifamily Investments
There are so many reasons why people choose to invest in multifamily properties. As they’re designed to keep every tenant under the same roof. You’ll only be dealing with that one roof if there’s a leak or reseeding the one lawn. Having only one property to manage is a cost savings and time saver.
Many like investing in multi-family units as it’s quite simple to find tenants. It’ll rarely be vacant, so you’ll be seeing that return on investment regularly. As it’s a multifamily property too, even if one unit is vacant others will be full, so you’ll still see a consistent cash flow.
Other Comparable Investments
If you’re already running a multifamily building, or you want to invest in something slightly different, what should you be looking into? Here are some ideas
Vacation homes: This works well if you live in an area that’s a tourist hot spot. You can buy a property and rent it out as a vacation home for those visiting the area. You’ll get the same benefits as you would with regular tenants, and you’ll be able to make good money from a few short-term tenants. However, you do need to keep the home in impeccable condition. You’ll also find there may be a downturn in tenants, if there’s a slow tourism season in the area.
Commercial property: This is a more expensive prospect than multifamily buildings, so if you want to go into commercial property, you’ll probably need a partner to work with. You can reap the rewards of this though, as you’ll see higher rents from businesses, and they’ll often want to sign on for longer periods.
Land: As the saying goes, you should buy land as they aren’t making more of it. If you buy land in an area that is in high demand, you can make the most of it. You have options: build property, rent it out, or sell it on for a profit. Be aware that if it’s not in the right location though, you won’t see the return you might be expecting.
These three investments can all help you diversify your portfolio. If you have one multifamily building now, try looking into one of these options for your next purchase.
“Location, location, location.” This cliché is often used throughout the world of real estate, often in relation to where the best investments are. New investors sometimes believe that investing in the primary markets in cities like New York, Boston, Los Angeles, etc. will provide the best security and returns.
However, there’s strong evidence to suggest that the middle-market is a better area of investment. Secondary and tertiary markets come with more affordable financing, and competitive vacancy rates to create stable returns.
Learn about the differences between the markets and the benefits of investing in primary or tertiary opportunities.
Defining Primary, Secondary, and Tertiary Markets
While there’s no one real rule regarding the definition, there are some guidelines to help conceptualize how the market is segmented.
- A primary market typically has more than five million residents. Take New York City as an example.
- A secondary market typically ranges from two million to five million residents.
- A tertiary market is typically classified as having fewer than two million residents.
The Benefits of Investing in Tertiary and Secondary Markets
Primary markets are expensive and can come with a high level of risk. Capitalization and vacancies need to be considered. Many investors find that the middle-market has more potential.
Vacancy rates in primary markets are less compelling and remain largely static. Los Angeles, for example, has hit a rate as high as 9.2% over the past two years.
Secondary and tertiary markets outside of metropolitan areas have a higher chance of appreciation in the long term. Take cities like Phoenix and Las Vegas, both of which are tertiary markets, where year over year rent growth is currently tracking close to 5%. In Boston and Los Angeles, growth is less than the national average of 2.6%. Similar figures can be found in other primary markets. Regulation plays a part. Primary markets are more likely to have legislated rent control, which can limit income growth for investors.
Job growth should also be taken into account. Industry expansion, particularly in the tech sector, has been most active in middle-market cities. Office rent growth in cities with high tech expansion has increased at a rate of up to 12% in the last two years. Job growth can lead to lower vacancy rates for commercial investment properties. America’s economy is currently in its longest-ever period of expansion, and a lot of this growth is found in middle-market cities and municipalities.
For first time investors and even experienced investors, the secondary and tertiary markets represent a strong opportunity in 2020. From office properties to multi-family homes, these are the investments that are primed for growth.
META: Understand the differences between primary, secondary, and tertiary markets, and see why the middle-market investment opportunities are more promising today.
On March 15, 2020, the Federal Reserve announced that it was cutting its benchmark interest rate to 0%. The decision was made as the government moves to offset the economic fallout caused by the novel Coronavirus and its spread in the United States.
Goldman Sachs has estimated that the economy could contract by 24% in the second quarter. In the current quarter, the decline is estimated close to 5%.
Anyone wanting to understand the relationship between Federal interest rate policy and recessions will gain some important insights from the following data.
A Modern History of America’s Recessions
The first major shock to the world economy after World War II was the 1973 -1975 Recession. This affected America and most of the developed world.
During this recession, the Federal Reserve was highly active, and rates were higher than we are used to today. In August of 1974, with the recession in full swing, the Federal Funds Rate was as high as 12.35%. It had been climbing from a rate of 9.83% at the beginning of that year. The Fed began to drop the rate, having it fall as low as 4.93% in May 1975. In this case, we see that the rate was climbing ahead of the recession, before peaking and declining to support economic growth.
The next major shock was the 2008 Great Recession. It followed the stock market’s all-time peak in 2007.
In September 2007, The Federal Funds Rate was sitting at 5.25%, an increase from 4.96% at the start of that year. The Fed began to drop the rate in response to economic decline. By the end of 2008, it was sitting at 0.1%. The recession peaked in 2009, but rates increased slowly. The Federal Funds Rate didn’t break 1% until 2017.
What Parallels Can We Draw to the Situation Today?
In modern history, rates have decreased during recessions, but not in the leadup. The Fed is mostly responsive. It reacts to market conditions and lowers rates to incentivize borrowing and spending.
Today’s situation is unique. Until last week, the Fed had been cautiously lowering the rate to prolong a sustained period of economic expansion. It now has little leverage, and economies of major cities and the entire state of California have effectively shut down.
This will be a moment in history not only for how the world deals with a viral pandemic but also for how quickly the economy can bounce back. Today’s rate may shorten the length of economic decline. Unfortunately, the wildcard of the ongoing health crisis makes it impossible to predict the duration or severity of what will happen in the coming months.