The saying goes, “The road to Hell is paved in good intentions.” Our society attempts to solve problems by throwing money at them and increasing government regulation. Well, money can’t buy happiness, or solutions for that matter. Neither is government ever the most efficient solution to our problems. The current economic upheaval left in the aftermath of the Covid-19 crisis has only been exacerbated by government intervention.
Case in point…government mandates requiring the cessation of foreclosures and evictions will only make the problem worse. Am I advocating that greedy lenders and landlords stick it to out-of-work homeowners and renters? Absolutely not! I am, however, stating in no uncertain terms that seldom does the meddling of bureaucrats and career politicians, who truly don’t comprehend the problem let alone the solution, solve an issue. Providing renters carte blanche to skip out on paying rent will have profound and unforeseen consequences on the availability of affordable housing in the future. In other words, we’re trading short-term relief for negative unintended harm to the economy and, to be more precise, the housing industry as a whole.
Most borrowers don’t understand that their scheduled payments were simply delayed, not forgiven. In a handful of months, all of those back payments will need to be paid all at once. Unfortunately, this means that a vast number of borrowers that either didn’t understand how forbearance works, can’t afford their payments, or simply didn’t sock the money to pay the piper will find themselves caught in a whirlpool circling the drain and US foreclosures skyrocket. That might seem like great news for many note and real estate investors, but bad news for the economy as a whole. I suspect that even real estate investors will find themselves behind the eight ball as their buyer pool and, possibly, home values begin to shrink.
Per a recent CNBC story, there are about 8 million landlords in the United States that own between 1 and 10 properties, which accounts for about half of the nation’s renters, or about 48 million tenants. About one third of those surveyed stated that if things got tight, they would simply stop paying rent. Now, don’t get me wrong, I’m not a callous person, but what happens to all those landlords who stop receiving rent but continue to have to pay their mortgages. At some point, those landlords default and for every default there are less rental units for renters to occupy. Most would jump to the conclusion that those landlords should also be allowed to skip mortgage payments. That sounds very reasonable on the surface, but then what happens to the lenders? Most people think that lenders have unlimited capital pools to absorb mortgage defaults, but 2007 and 2008 taught us that this wasn’t true.
Government intervention to allow renters to avoid paying landlords and borrowers to skip mortgage payments is clogging the pipes with tremendous pressure building behind the clog. The longer these moratoriums exist, the more the pressure will build until, in the not-so-distant future, the pipes explode. Although these policies and mandates are filled with good intentions, the pressure that is building up in our housing market is only building and building to a greater explosion. The more the government kicks the can down the road, the louder the boom will be and it’s always the little guy that gets caught in the firestorm.