Ten years of rising home prices have given homeowners close to $10 trillion in home equity that may be threatened as the coronavirus pandemic forces millions of Americans into economic hardship.
Real estate investors are taking advantage of distressed sales, buying up billions of dollars of single-family homes to rent out or resell, Wall Street Journal reported.
It’s not exactly a repeat of the subprime mortgage crisis of 2007 to 2010, when prices fell, triggering defaults after banks sold too many mortgages to feed the demand for mortgage-backed securities sold through the secondary market.
Wall Street landlords bought up homes as fast as they could.
As the pandemic progresses, there is likely to be a lot of forced sales and new renters. Bidding wars are becoming a thing, WSJ reported.
Early signs of an economic recovery showed that Black workers were being left out. White unemployment fell from 14.2 percent in April to 12.4 percent in May, while black unemployment rose from 16.7 percent in April to 16.8 percent in May.
Having home equity but no way to make payments could push many people to sell while home prices are high and become renters with cash in hand, said Ivy Zelman, CEO of real-estate consultant Zelman & Associates.
“A lot of people are house-rich but cash-poor,” Zelman told WSJ. “If they bought in the last two or three years, even if they bought five months ago, they have equity.”
For people with a mortgage, home equity rose 6.6 percent annually in the second quarter, according to CoreLogic. Collectively, that adds up to $9,800 per home, CNBC reported.
Rising home values have happened in 48 of the 50 largest metropolitan housing markets in the U.S.
Inventory of homes for sale is at least 29 percent lower annually for the week ending Sept. 12, according to Zillow. As long as supply is low and demand is high, home prices will continue to rise, CNBC reported. Some people argue that with high unemployment, there is a limit.
CoreLogic predicts that home price growth will slow over the next 12 months and mortgage delinquencies will continue to rise, RISMedia reported. Combined, these factors could lead to an increase of distressed-sale inventory, which could send home prices lower and negatively impact home equity.
Individual investors and investment firms have bought more than one in every 10 homes sold in the U.S. for the last decade, WSJ reported. City dwellers are houses and apartments looking for room for home offices and space between them and their neighbors. And millennials are attracted by historically low mortgage rates.
Building home equity is one way to build wealth. Some people may qualify for a home equity loan.
However, despite the economy, home equity loans are at a record low, according to Don Bennett, president of Freedom Bank in Columbia Falls, Montana.
“If somebody is looking to improve their home, now probably would be a good time to get a home equity loan,”Bennett told KRTV, the MTN News affiliatea. “Depending upon the amount of the loan and what their existing interest rate is on their current home. It might just make sense to re finance.”
Shares of the two largest landlords, Invitation Homes Inc. and American Homes 4 Rent, are up 79 percent and 59 percent since stocks bottomed on March 23, WSJ reported. By comparison, the S&P 500 is up about 50 percent.
Investment firms Blackstone Group Inc., Koch Industries Inc., J.P. Morgan Asset Management and Brookfield Asset Management Inc. have each made nine-figure investments in single-family rental companies looking to expand.
Other home-rental operations have also sold nearly $6 billion of rent-backed bonds, including three deals presently in the market, according to Akshay Maheshwari of Kroll Bond Rating Agency.
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