Analysis: The Economic Impact of Ending the Eviction & Foreclosure Moratoriums in 31st July 2021
As many of you are aware the eviction & foreclosure moratorium were implemented to provide relief to those who were affected by the economic turmoil caused by the COVID Pandemic. What many folks aren’t considering is the economic fallout as a result of these programs that will end on the 31st of July.
- The eviction moratorium prevented landlords from evicting tenants from apartments and rental homes.
- The foreclosure moratorium prevents banks from foreclosing on federally backed mortgages.
- The mortgage forbearance program allows homeowners to pause or reduce their mortgage payments for a limited time while they build back their finances
- Economic Repercussions of the Eviction Moratorium:
- As landlords could not evict tenants, the price of rent likely increased to make up for those who simply stopped paying. Of course this does not ring true for all markets, but likely most markets in most areas (Plenty of data out these showing rents going up by 9.2%). However, it would be naïve to assume that folks aren’t gaming the eviction moratorium. I personally know folks who rent out their homes who haven’t received rent in over a year. And the occupants aren’t exactly wanting for money.
- Approximately 43m housing units in the US are occupied by renters. The average rent is $1,100 a month (conservative estimate). If just 1m people stopped paying rent for one month, that would mean there would be an additional $1.1b in the general economy that otherwise would not be spent if these people payed their rent. Per annum that’s a possible $13.2b spent. The US averages 3.6m evictions a year. So regardless if there is an eviction moratorium, 3.6m people are going to get evicted for not paying rent. Assuming these people who would have been evicted anyway are gaming the system, this amounts to $3.96b per month, $47b per year, of money going into the general economy that otherwise would be going to rent. Assuming COVID had an adverse economic impact of an additional 1.4m paying tenants, this would amount to $5.5b per month, or up to $66b per year, that was spent in the general economy that otherwise would have been spent on rent. Assuming COVID had a seriously (And I do mean SERIOUSLY) bad effect on renters, say … double the amount that would be normally evicted in one year (Roughly 8m units), we’re looking at $8.8b per month, or $105b per year. However the Aspen Institute estimates that 20m renters suffered a COVID related job loss, and 28.9m-39.9m tenants are at risk of eviction in 2020. Assuming a tannate household of 2.5 people that would mean a possible $12.7b/mo-$152.6b/yr on the low side to $17.5b/mo-$211b per year on the high side. You get the point.
Analysis: There is no telling how much money is being spent in the general economy that otherwise would have gone to rent, but we can assess that it’s many billions. As a result, the general economy likely pumped quicker than it otherwise might have amid the pandemic (ceteris paribus). However the amount of money being withheld from landlords has likely resulted in higher rents for new tenants in most areas, as renters attempt to make up for non-paying tenants. Rising rents likely played a role in the housing boom as well (Combined with record low interest rates & millennials buying first homes, & folks fleeing restrictive COVID cities), as rent in many places exceed that of a mortgage. Once the eviction moratorium ends we could be looking at hundreds of billions being sucked out of the general economy as a result of folks being forced to pay their rent again. However when we take into account the marginal propensity for both businesses and individuals to consume this number changes drastically. Remember that every dollar received by both business and people, a certain percentage is spent on goods and services while a smaller percentage is saved. This is what keeps our economic engine running. For example, if the average consumer spends 90% of their income and saves 10%, that’s $10.00 spent in the economy for every $1 received. Se we are likely looking at trillions of dollars being sucked out of the economy … not billions. Moreover, those who get evicted will have ruined credit, which has further implications on future spending.
- Economic Repercussions of Foreclosure Moratorium and Mortgage Forbearance: I believe the foreclosure moratorium only applies to federally backed mortgages, but it would not surprise me if there are lenders outside this realm are also participating. Once again I would not be surprised if folks are gaming this benefit. To what extent I have no clue, but from 2019 to 2020 foreclosures fell by roughly 50%, from 493,066 to 214,323 nationally. Assuming much of this was due to the foreclosure moratorium we can expect foreclosures to skyrocket once the foreclosure moratorium and mortgage forbearance ends. By how much? Likely somewhere between 500,000-1,000,000 homes in 2022 (ceteris paribus) when we take into account the damage done by COVID. This assumes the government takes no further action for mortgage relief.
Analysis: Assuming the foreclosures hit in 2022 at the rate indicated above, there could be as many as 1m homes flooding the market driving down the cost of housing and the demand for homebuilder products. Like the rent moratorium, mortgage forbearance is likely resulting in money flooding the economy that would have otherwise gone to a full mortgage payment. If the Federal Reserve were to raise rates to reign in inflation, this would seriously cool off the housing market. Perhaps this is why the Fed is hesitant to raise rates.
- Credit Crisis: Both the foreclosure moratorium and the eviction moratorium are set to expire on July 31st 2021. As a result the rate of evictions and foreclosures will likely skyrocket. Those foreclosed on or evicted will likely have some serious credit issues. Their credit scores will be negatively impacted, their ability to access credit hampered, and liens will be placed on their property as renters pursue past rent due. Many will have judgements against them. As this will no doubt affect their general credit, they will be hampered on how much they can spend on credit,.
- Trillions Sucked out of the Economy: For those evicted or foreclosed on, particularly those who gamed the system, a larger portion of their income will need to go back to renters/banks, as opposed to being spent in the general economy. Reduced credit will also result in less spending on credit. As a result of both these phenomena there could be trillions sucked out of the economy when we consider the marginal propensity for both businesses and individuals to consume. Remember that every dollar received by both business and people, a certain percentage is spent on goods and services while a smaller percentage is saved. This is what keeps our economic engine running. For example, if the average consumer spends 90% of their income and saves 10%, that’s $10.00 spent in the economy for every $1 received.
- Cooling of the Housing Market & Home Building Materials: The housing market will cool off as more houses flood the market and so too will the cost of home building materials. The demand for rentals may also cool, but slowly.
- This is the Reason The Federal Reserve is Maintaining Low Rates: The reason the Federal Reserve doesn’t seem to be concerned about inflation is simply for the fact that they expect the ending of the eviction and foreclosure moratoriums to have a counter-inflationary effect (I avoided "deflation" for a reason, the low rates are to ensure a steady rate of inflation amid what they foresee as inbound rough economic times). No, the Federal Reserve isn’t talking about it, because they don’t want folks to panic. So they will take their criticisms and knocks now so as long as when these housing programs end they can offset the negative effects. However if the FED suddenly raises rates you can bet that the aforementioned issues will be amplified. So keep an eye out.
What am I missing? Please comment below. Sorry for the hasty and incomplete analysis, but its worth a conversation given that the eviction & foreclosure moratoriums are set to end THIS MONTH! No doubt much of this information will not pan out as expected above, that’s why this is an assessment, … a projection if you will. But will the economy be negatively impacted? I think so. The only question is by how much?
However this all turns out you will want to watch the exposure in your portfolio and assess how this will affect the sectors you’re invested in.
Note: Many states have extended similar programs until September.
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July 20, 2021 at 03:46PM