Homeowners Grappling with Financial Stress, High Equity, Low Inventory, and Rising Rents: To Foreclose or Not?

The real estate market has been facing an important question lately: when will there be an increase in inventory, and what factors will contribute to it? Given the steady decline in inventory levels since the housing crisis of 2008, it should not be surprising to real estate professionals who closely analyze the data. However, what has been difficult to anticipate is the rapid decrease in inventory following the pandemic. The combination of low inventory and historically high home prices has dominated the market headlines for the past three years.

As we entered 2023, many real estate professionals found it challenging to predict what the year had in store. Some individuals even predicted a crash in prices, with comparisons drawn to the events of 2008. However, if we take a look at the graph below, it becomes clear that home prices in 2023 are gaining momentum and are poised to surpass the prices of the previous year. The upward trajectory of prices is truly remarkable.

Just five weeks ago, the Week over Week (WoW) price growth stood at a modest 0.36%, while the Month over Month (MoM) gains reached 2.32%. However, as of May 29th, we can observe a significant acceleration in price growth. The WoW growth has now reached 1.56%, and the MoM gains are at an impressive 4.37%. The remarkable surge in prices is catching everyone's attention due to the rapid rate at which they are increasing.

What is fueling this remarkable price growth? The answer is quite simple: the real estate market is currently grappling with a significant supply and demand imbalance. In fact, the total number of active listings has reached levels below those of 2022 for the first time this year. It's worth noting that over 50% of the housing inventory is already under contract, which makes the situation particularly challenging for home buyers.

Unfortunately, we have also seen a Year over Year (YoY) decline in net new listings this year. Recently, there has been a considerable 18.6% Week over Week (WoW) decline in new listings, further exacerbating the already low number. With the number of listings under contract still surpassing the number of new listings entering the market, there are no signs of relief for the ongoing inventory crisis we have been facing throughout the year.

Another contributing factor to the low inventory is the challenge of affordability, driven by the rising home prices and the impact of "mortgage rate lockdown". Take a look at the chart below, and you'll see just how quickly mortgage payments have increased over the past two years. This situation has made it difficult for homeowners looking to upgrade to a larger house or for first-time homebuyers seeking affordable housing options.

Currently, the median monthly payment for a single-family house stands at over $2,200, assuming a 20% down payment. This high cost of homeownership has resulted in many potential buyers feeling trapped in their current homes. With low interest rates and low monthly payments, homeowners are finding it challenging to make the move to a new property. Additionally, when a homeowner lists their house for sale, they also become a potential homebuyer themselves, which somewhat balances out the supply and demand dynamics and doesn't increase inventory.

Increasing the number of listings on the market and boosting inventory is indeed a tough nut to crack. Without lower interest rates or government incentives, it is unlikely that we will see a significant increase in transactions within the market. Overcoming these obstacles requires careful consideration and innovative solutions to address the current challenges we face in the real estate market.

One potential solution that comes to mind is new construction. However, I'm afraid the current data suggests otherwise. Looking at the numbers for April 2023, both new residential construction permits and starts have seen a significant decline of over 20% compared to the previous year, while completions have only experienced a minimal increase of 1%.

While an increase in new construction can have positive effects on both the job market and the housing market, even with a notable acceleration in the construction process, it would not have a substantial impact on the overall inventory levels for several more years. Despite the potential benefits, it seems that new construction alone may not be the silver bullet solution we were hoping for.

There is a thought circulating that foreclosures could potentially be the solution to the inventory issue, considering the current economic pressures such as the banking crisis, debt ceiling concerns, layoffs in the tech industry, and the persistent threat of recession for the past 18 months. The idea suggests that homeowners facing financial difficulties may start defaulting on their mortgages, thereby increasing the number of homes available for sale. However, I respectfully disagree with this viewpoint and here's why.

In today's low inventory environment, homeowners possess substantial equity in their homes. It's worth noting that, on average, a home seller can expect to sell their property in less than 30 days, with the equity for single-family homes averaging above $200,000. This presents an opportunity for homeowners facing financial stress to potentially sell their homes at a significant profit and utilize that equity to address their debts. They could pay off their car loans, credit card bills, and even build up their savings.

While it's true that rental prices remain high overall, the upside to this line of thinking is that a homeowner in financial distress can leverage their capital to move to a more affordable housing market. This provides them with a chance to embark on a "fresh" start in life, with the potential to improve their financial situation and create a more stable future.?

Another important aspect to consider is the rental market. At the beginning of the year, there were predictions that the Single-Family Rental (SFR) market had reached its peak, mirroring the trends observed in the home purchase market. Although rental prices have not experienced the same rapid growth as home prices, they are still on the rise nationwide. You may have come across headlines suggesting a decline in rental inflation, but it's important to note that such trends are specific to the SFR market.

While rental prices are steadily increasing, there is a notable $400 difference in median costs when comparing renting versus owning a home. Homeowners facing financial difficulties need to carefully analyze their situation, considering the pros and cons of each option. This calls for a thorough examination of their personal finances, with the help of spreadsheets and detailed calculations, to determine the most suitable course of action.

In conclusion, the real estate market is facing a complex situation with low inventory, soaring home prices, and rising rents. The supply and demand imbalance is a significant driver of the price growth we are witnessing, with active listings reaching levels below previous years. The challenge of affordability adds to the complexity, as homeowners struggle to upgrade or enter the market due to high costs and mortgage rate lockdowns.

While there have been suggestions of foreclosures as a potential solution to increase inventory, there are alternative options for homeowners in financial distress. Selling their homes with the substantial equity they possess can help them address debts and create a fresh start. Additionally, although rental prices continue to rise, homeowners can use their capital to explore more affordable housing markets.

Analyzing the pros and cons of renting versus owning, homeowners can make informed decisions that align with their financial circumstances. It's essential to carefully assess personal finances and weigh the available options using spreadsheets and detailed calculations.

Ultimately, addressing the inventory crisis and improving affordability require innovative solutions, such as lower interest rates or government incentives, to stimulate market transactions. By navigating these challenges thoughtfully, homeowners can find opportunities to improve their financial situations and establish a more stable future.

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