A Tale of Two Crises
Foreclosure.com Scholarship Program Winning Essay 2021, (Runner up)
By Blake Casillas | San Diego Community College District
The phrase “history repeats itself” is a fallacy. If it were true literally, we would live in a strange, twilight-zone-world where the same events occur in endless loops like a planet wide Groundhog Day. History does not repeat itself, but it can be a reflecting pool for us to ponder into and find similarities in our own behaviors and humanity. No two events occur in the exact same way; they may be similar but understanding their differences can be just as important as their likeness. We as humans have a bias toward comparing and finding similarities in order to recognize the consequence of a particular situation, often referred to as heuristics. This kept us alive in the face of unseen predators lurking in the brush. The financial crash in 2008 that led to The Great Recession was traumatic for the American people and even the global economy. So naturally, when a global pandemic cripples the most powerful economies of the world, we fall back on our heuristics and analyze the similarities in each economic crisis to apply the lessons we have learned. Although, we may forget sometimes that there are important lessons in the differences. The economy, but specifically the U.S. housing market, took a familiar nose dive upon the arrival of Covid-19. However, in contrast to the financial crash of 2008, supply and demand pressures coupled with stimulating fiscal policies have stifled the rate of foreclosure and subsequently impeded the participation of first-time buyers in the U.S. housing market.
Beyond the obvious, these two financial crises within the real estate market differ in a several ways, but let’s first examine what happened in 2008. During the years leading up to 2008, investors began speculating on a novel security known as collateralized debt obligations; CDO’s for short. Thousands and thousands of home mortgages from the general population were packaged into securities that could be bought, sold, and speculated on, similar to a stock. In essence, they granted large investors the ability to invest in one of the most reliable and low-risk facets of the economy: the U.S. housing market. It was reliable and low-risk due to the simple fact that the majority of Americans pay their mortgages on time and its consistent year-over-year growth was like betting on Old Faithful to erupt. Unfortunately, what investors did not count on were predatory lenders handing out subprime mortgages like Halloween candy and securities ratings agencies getting paid to “overvalue” these subprime loans. The day of reckoning soon arrived when scores of homeowners suddenly defaulted on their loans and the values of CDO’s melted away into oblivion. Foreclosures in the housing market skyrocketed while the median home value tanked. With a sharp increase in supply from foreclosure and drop in consumer demand, housing prices remained low for years after the crash.
Now, we fast forward to February 2020 and the housing market has recovered, growing safely and steadily. But we all know what happens next: enter Coronavirus stage right. The nations of the world close their borders and lockdown their citizens in an attempt to flatten the swelling curve of Covid-19 cases and deaths. Millions in the U.S. lose their jobs or main source of income, setting up perfect conditions for another tsunami of foreclosures and economic depression. While the economic downturn was steep and painful, a few important differences occurred in contrast to 2008. First, the Department of Housing and Urban Development issued an eviction and foreclosure moratorium which allowed Americans to defer mortgage payments until after the moratorium. The rate of foreclosure plummeted to 0.5% of total loans compared to over 3% in 2009. A near halt on foreclosures, people sheltering in place, and massive uncertainty shifted the supply curve of homes leftward. The federal reserve responded to the economic downturn of the pandemic by lowering interest rates to near zero to encourage borrowing and spending. Additionally, the federal government injected trillions of dollars directly into middle and lower class Americans through passage of the CARES act which we all saw as stimulus checks. These stimulating policies eventually shifted the housing market demand curve rightward and the net result was a drastic increase of median home prices within the span of a year. The initial crash during March 2020 may have brought flashbacks of 2008, but the impact of Covid-19 on the housing market was nearly inverse to the aftermath of the previous crisis.
This different economic outcome may not seem as detrimental as its 2008 predecessor, but there are still those suffering from the effects of this current economic turmoil in the housing market.
By combining a foreclosure moratorium and multiple stimulus payments, many mortgages transitioned from foreclosure status or 90 days past due to current. Home prices rose swiftly and many homeowners watched their equity rapidly inflate, further preventing foreclosure. Thousands of Americans avoided the pain and stress of foreclosure resulting in a win for owners, lenders, and many other invested parties. However, inflating home prices and low supply comes at a cost. Numerous younger, first-time buyers were quickly priced out of the market. Before the pandemic, $50,000 over asking price was rare and typically circumstantial.
But in today’s market, 100 cash offers $40,000 or $50,000 over asking price on a typical residential home seems all too common. These strategies and prices are simply unattainable to most first-time buyers like zillennials and first-generation immigrants. The result may further the gap in wealth inequality, especially generational wealth. This inequality can have a rippling and compounding effect through America’s economic future. Corrections in the current supply and demand will likely take years. In addition, the unpredictable nature of coronavirus and the current supply chain squeeze will continue to fuel inflation in the general economy and bleed into the housing market. While it is near impossible to predict a market crash, the current growth in housing value does not show the same malicious indicators witnessed prior to 2008. As housing supply slowly catches up with demand we will likely see a more attainable price equilibrium without catastrophic failure. Though it may be a disproportionate seller’s market, the marvel of American Capitalism has demonstrated resiliency and elasticity throughout it’s history; this instance will be no different. But even after economic normalization, today’s generation of first-time buyers will feel the effects long into the future.
In summary, supply and demand pressures from the Covid-19 pandemic coupled with stimulating fiscal policies have stifled the rate of foreclosure and subsequently impeded the participation of first-time buyers in the U.S. housing market. These last two years as we looked back in the reflecting pool of history we learned to react quickly to crisis and facilitate rapid economic growth. We gave people a fighting chance against foreclosure and many gained equity in their homes, further stimulating the economy. But with the dichotomy of buyers and sellers, a prosperity in one can result in depression of the other which cannot be overlooked. Greater investment from governmental institutions, local and federal, must be made to foster the homeownership of first-time buyers. Constructing an inclusive framework for the next generation of homeowners will ensure economic prosperity for the nation, now and in the future.
The winning essay above was submitted to Foreclosure.com’s scholarship program. To submit an essay for the current Foreclosure.com scholarship, please click here.
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