When the government prop ends, the distress will begin

As the 2020-2021 recession continues, many measures of economic success have people wondering — are we done yet? Have we exited recession mode and entered a recovery?

True, the stock market has exceeded pre-recession levels, home prices have increased rapidly over the past year and foreclosures and evictions are non-existent.

In fact, the St. Louis Federal Reserve Bank’s (FRB’s) Household Distress Index peaked during the Great Recession at 2.46 in 2009 and gradually decreased over the following years. It did not fall below zero, indicating “normal” household conditions, until 2015. During the ongoing recession that began 14 months ago, this index peaked at a much lower 1.29 in April 2020 and fell sharply. The index plunged into typical market territory a few short months later.

The casual observer may be tempted to assume the negative Household Distress Index means we are out of the recession and already on the road to a solid recovery. But there is one big complicating factor: government stimulus and intervention that has artificially propped up households during the COVID-19 pandemic and 2020-2021 recession.

Examples of ongoing government intervention include:

• moratoriums on evictions for renters and foreclosures for homeowners;
• three rounds (thus far) of stimulus payments to individuals;
• extended unemployment benefits; and
• forgivable loans to small businesses impacted by COVID-19 to continue paying employees.

In contrast, during the Great Recession, there were many measures in place to protect large businesses and banks. But there were no individual stimulus payments or moratoriums on evictions or foreclosures (though, eventually, more rules were put in place to protect some homeowners from unfair foreclosure procedures).

Related article:

Moratorium Watch 2021

The economy’s training wheels are coming off

What happens when all of this extra support ends?

For the housing market, of most concern are the high levels of seriously delinquent mortgages. Unless these mortgages — consisting of roughly 5% of U.S. mortgaged homes — are in good standing in a forbearance program, they will be headed for foreclosure upon expiration of the moratorium. This sunset date is currently set for June 30, 2021.

When the moratorium ends, the nation’s 1.1 million delinquent homeowners who are not enrolled in a forbearance program will face foreclosure.

A similar dynamic is occurring in the rental market, with the eviction moratorium also in place through June 30, 2021. When the moratorium expires, landlords will be able to eviction tenants for non-payment of rent, and vacancies are expected to rise.

Currently, government intervention is providing support to tide over households as a measure of health and safety during the COVID-19 pandemic. But as more people become vaccinated and the government sees less of a need to ensure the population remains in their current housing arrangements, the extra support will fall away, well before many will be able to stand on their own.

That’s because the historic job losses of 2020 persist. Going into 2021, 1.4 million Californians who were employed before the recession were still jobless. Without jobs, these individuals will be unable to make payments when the moratoriums end, and will lose their housing, to the detriment of themselves individually and the market as a whole.

The housing market’s performance in 2021-2024 will depend on the timing and extent of any additional stimulus or extensions of the moratoriums. But the most potential will be from job creation, whether it be through government-sponsored programs or jobs returning organically over the next several years. Either way, the recovery of jobs is essential to returning some stability to the housing market and the economy.

Without jobs, the economy’s progress will fall back when government intervention ends, a part of our ongoing, w-shaped recession.