Homeowners should’ve gotten more help back in 2008. At least that’s become the consensus among economists in the decade since the financial crash and subsequent foreclosure crisis. It’s also why Democratic and Republican lawmakers alike came together to protect struggling homeowners by creating a COVID hardship forbearance program, which allowed mortgage borrowers to pause their payments, in March 2020.
But on Sept. 30 the expanded mortgage forbearance program will finally begin its wind down—something that will have far-reaching effects on the broader economy and the housing market. There’s never been a forbearance wind down like this, making the consequences all the more uncertain.
At its height, the program protected 7.2 million homeowners. As the economy improved—with the unemployment rate falling from nearly 15% in April 2020 to 5.2% as of Aug. 2021—the number of borrowers in the program dropped, too. Now, there are just 1.5 million borrowers protected by the program. While some of these borrowers will be ready to resume their mortgage payments, others won’t. In fact, the real estate industry is already preparing for a supply shock: Hundreds of thousands of these currently protected homes could soon be put on the market.
Just don’t expect that supply shock to come via foreclosures. Almost all of these borrowers have positive equity in their homes. So instead of foreclosing like the underwater 2008 homeowners, most can simply list their homes for sale. The ongoing strong COVID-19 housing market means these sellers might only have to wait days—or hours—before finding a buyer.
At first glance, 1.5 million homes might not sound like a lot—considering we’re a nation of 80 million homeowners. However, at the most recent count, there are only 1.3 million homes for sale, according to the National Association of Realtors. So if even a fraction of those homes currently in forbearance opt to list, it’d create something of a supply shock in the market.
“A flood of new inventory, that’s going to change conditions in the [housing] market,” Chris Glynn, an economist at Zillow, told Fortune. “It’s taking the foot off the pedal a bit.”
Not all of these borrowers are getting kicked off the program at once. Instead, they’ll be phased out in monthly chunks through 2022. But the largest group is coming first: An estimated 452,000 borrowers will leave forbearance on Sept. 30. That’s followed by 287,000 in October. That’s why the industry is closely watching, in particular, how it’ll impact the housing market this fall.
But the big question is how many of these borrowers in forbearance will actually list their homes for sale?
That’s something Glynn and other researchers at Zillow attempted to answer. They recently published a study that estimates 25% of the 1.5 million borrowers set to leave forbearance will opt to list their home for sale rather than resume mortgage payments. That would add an additional 211,700 homes for sale on the market this fall.
An influx of inventory, of course, would be welcome good news for homebuyers who have been pitted against each other in one of the nation’s fiercest housing markets ever. Housing inventory has been depleted by a combination of COVID-19 recession-induced low mortgage rates, a demographic wave of first-time homebuyers, and remote workers able to branch out geographically. Indeed, between April 2020 and April 2021 inventory of homes for sale on realtor.com plunged 53%. At one point this spring, housing inventory was at a four-decade low.
Even before this expected wave of new inventory, the red hot housing market is starting to lose some steam. Since bottoming out this spring, inventory has risen 30%. Some of that is a result of homebuyer fatigue—you can only lose so many bidding wars before taking a pause. Meanwhile, some of the uptick is a result of sellers finally feeling comfortable enough to move amid a pandemic.
Nevertheless, there’s widespread consensus in the industry that the market can easily weather 25% of forbearance borrowers listing their homes. Glynn calls this more of a “rebalancing” event.
But what if Zillow’s prediction is wrong, and more than 25% of borrowers in forbearance put their homes for sale? After all, this 25% figure is derived from the percentage of borrowers who exited the program over the past year and went on to list. It’s possible these remaining borrowers who have stayed in the program are in a worse financial position. If the estimate turns out to be low, and the actual percentage of forbearance borrowers who list is closer to 50%, then, the Zillow researchers write, the housing market would see “a significant deterioration from current conditions.”
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