The housing market is booming. Is this another indication that the recovery from the Pandemic Recession is complete for the rich, while low-income households are left behind? No, it isn't.

It's primarily driven by the usual suspects in any market: supply and demand. But serious challenges are looming for low-income homeowners. Expect a wave of foreclosures in 2021.

A slew of recent data shows that in the U.S., housing is going gangbusters. Sales of existing homes increased by 9.4% in September to 6.6 million units on an annual basis, its highest level since May 2006. The median existing-home price was 14.8% higher than in September 2019.

New-home sales slipped in September relative to August, but are up 32.1% over the year. Seven in 10 homes sold in September were on the market for less than one month. In 20 metropolitan areas - including Phoenix, Seattle and San Diego - home prices rose more in August than in any month in the past two years. The AEI Housing Center's Home Price Appreciation Index shows 8.6% annual gains in September, up from 5% in September 2019.

All told, housing could be one of the few sectors of the U.S. economy to make a positive contribution to overall economic growth this year.

Why? These impressive gains are not driven primarily by a "K-shaped" recovery from the Pandemic Recession, in which high-income households are seeing gains while lower-income households continue to struggle. Instead, the main reason housing is doing so well is the combination of strong housing demand and limited supply, both of which have roots that predate the onset of the pandemic.

Forbearance provisions expire in 2021

A wave of foreclosures is likely coming that will hit low-income homeowners. As of August, over 10% of the eight million single-family mortgages backed by the Federal Housing Administration were delinquent by more than three months.

According to the FHA, the reason for 86% of those delinquencies was "a national emergency," a category that includes the pandemic. These delinquencies are heavily concentrated among loans associated with low credit scores.

At the same time, the FHA reports that foreclosures have ground to a halt. In August, 352 foreclosures were started, compared with 10,438 in February.

An important explanation for why there are so few foreclosures amid so many delinquencies can be found in the Cares Act, the economic recovery law passed in March. It included forbearance provisions that allowed borrowers with government-backed mortgages to postpone (or reduce) payments for up to 12 months if they suffered COVID-19-related financial hardship.

When these forbearance provisions expire in 2021, expect a wave of foreclosures to follow.


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