Residential contractors have seen a major boom in home construction projects during the COVID-19 pandemic, but the looming deadline for two government programs could significantly increase financial risk in the residential construction sector.
The same government aid and assistance that aided the housing market so significantly during the early days of the COVID-19 pandemic is now set to lapse. The federal moratorium on foreclosures came to an end on July 31, 2021, while a federal mortgage forbearance program — which allows borrowers to pause their mortgage payments, keeping them safe from foreclosure — will expire on September 30, 2021.
As the mortgage program lapses, however, close to 1.75 million homeowners are still in forbearance plans, and around 20% of that group currently will not be able to extend their forbearance past September 2021. On top of that, 1.5 million additional homeowners are at least three months behind on their mortgage without the protection of a forbearance plan.
Simply being assisted to stay away from foreclosure isn’t enough for a large number of homeowners, as well. A number of homeowners may have no option but to sell their homes — but, it’s been estimated that 1 in 10 borrowers currently in forbearance will not have enough equity to sell, further hurting homeowners and the housing market as a whole.
This shift leaves the residential construction sector in a difficult place, as homeowners who suddenly have to return to making large mortgage payments may cancel possible home renovation and development projects — or could even fail to pay contractors for work already done.
Many are concerned after already seeing a noticeable drop in home construction in recent months. According to Redfin, US home prices grew by 24.8% between June 2020 and June 2021, with demand growing and supply dwindling as time has gone on: the number of homes sold in this time period increased 20.6%, while the number of homes for sale fell by 39.6%.
However, recent data is suggesting that building is slowing down, and some are concerned that the major housing boom is finally falling. As per US Census Bureau and US Department of Housing and Urban Development (HUD) data on monthly new residential sales, sales of new single-family houses in June 2021 dropped 6.6% below the May 2021 sales rate.
New residential construction projects may already be declining
Residential construction has been strong throughout the pandemic, and numbers are still significantly up when compared to prior data. However, the high level that construction has been at over the past year may only serve to obscure the current trends.
According to the US Census Bureau, in June 2021, building permits fell to nearly 100,000 units below the six-month average — the lowest point since August 2020.
Though the 1.6 million housing units authorized in June 2021 marks a 23% increase over June 2020’s numbers, it’s a 5% decrease over the numbers from May 2021.
“The single-family market in particular desperately needs more new homes, especially on the lower end where first-time homebuyers need some price relief and more supply choices, but we also know that it is getting more and more difficult to deliver from a builder perspective at the wanted price points,” noted Bleakley Advisory Group Chief Investment Officer Peter Boockvar.
Additionally, mortgage applications are dropping significantly, another piece of information that displays the shifting market. As per the Mortgage Bankers Association, new applications are in their third consecutive month of decline, dropping nearly 24% in June 2021 when compared with June 2020.
“Homebuilders are encountering stronger headwinds of late, as severe price increases for key building materials, rising regulatory costs, and labor shortages impact their ability to raise production. This has dampened new home sales and quickened home-price growth,” said Mortgage Bankers Association economist Joel Kan.
“In addition to price increases, we are also seeing fewer purchase transactions in the lower price tiers as more of these potential buyers are being priced out of the market, further exerting upward pressure on loan balances,” Kan added.
As with construction projects throughout this period, residential construction is starting to be held back by the supply shortages that are being felt across the nation. Levelset coverage in both June 2021 and July 2021 noted that supply shortages have continued to weigh on contractors throughout the pandemic, and these issues have yet to ease back even as the housing market changes.
“Construction contractors are continuing to lose money because of this jump in materials costs,” Ken Simonson, chief economist for Associated General Contractors of America, said of continuing supply chain problems. “Materials costs have gone up 24% over the last year, while bid prices for new construction work have only risen about 2.8%.”
“The recent weakening of single-family and multifamily permits is due to higher material costs, which have pushed new home prices higher since the end of last year,” added Robert Dietz, chief economist for the National Association of Home Builders. “This is a challenge for a housing market that needs additional inventory.”
The issue of this needed inventory is a particularly difficult one that has been one of the many factors driving the booming housing market, as the country has been dealing with a major need for additional housing.
According to the National Association of Realtors, the US has averaged 2.5 million housing units available for sale at any given time over the past 40 years. However, in 2021, housing inventory hit its lowest level since the association began tracking data — currently, there are only 1.37 million housing units available for sale.
Builders are being held up by all of these factors already, and some feel the possibility of further decline stemming from mortgage debt may only compound problems.
Biden administration hopes to prop up homeowners, housing market through mortgage relief program
Congress had previously approved $10 billion in federal assistance to help homeowners pay off mortgage debt. However, the program is moving too slowly for states to have figured out how to distribute the money before the foreclosure and forbearance protections expire nationally.
In the meantime, the White House announced on July 23, 2021, that a number of homeowners with federally backed mortgages could be eligible for a reduction in their monthly mortgage payment in an effort to lessen the impact of restrictions falling.
Homeowners that are struggling with any government-backed mortgages “will now receive enhanced assistance, especially if they are looking for work, re-training, having trouble catching up on back taxes and insurance, or are continuing to experience hardship for another reason” — with the federal government offering a “roughly 25% reduction in borrowers’ monthly principal and interest (P&I) payments.”
“Based on recent analyses, the Administration believes that the additional payment reduction offered to struggling borrowers will result in fewer foreclosures,” the White House press release noted.
The release adds that, for homeowners who can resume their monthly mortgage payment, federal agencies will continue requiring mortgage servicers to offer options that allow borrowers to move any missed payments to the end of the mortgage period at no additional cost to the borrower.
Though they will have more variance, state and local programs are also popping up that could help assist people with mortgage payments.
In Texas, for example, the deadline for the state’s eviction diversion program was extended to October 1, 2021. Local groups like the Texas Salvation Army are also extending financial help, with Salvation Army Coastal Bend Business Manager Emily Shafer Northrup noting that the group has helped around 150 families with rent, utility, and mortgage assistance.
These programs will likely have different requirements than the federal programs, however. Northrup noted that “mortgage holders cannot be in forbearance or in foreclosure to qualify” for the organization’s assistance program. There’s an additional opportunity for the amount of homeowners that will be in forbearance to grow, however — the White House noted that HUD, the Department of Veterans Affairs (VA), and the Department of Agriculture (USDA) will continue to allow homeowners to enter into COVID-related forbearance through September 30, 2021.