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article imageOp-Ed: This could get nasty — Evictions in US could spark a big crash

By Paul Wallis     Jul 26, 2020 in Business
New York - The news for renters and mortgagees in the United States is grim enough. The moratorium on evictions is due to end, and about 22% of American households aren’t ready for it according to the Census Bureau.
The possible upheavals in the market aren’t good news for anyone, and that includes property owners. Landlords and banks could be left with empty assets they can’t rent or sell. The huge unemployment surge has trashed many people’s finances. That means these properties could become major, expensive liabilities.
With no end in sight to the US pandemic, the damage to the US economy could be very long-lasting. Forget “dystopian futures” this is a dystopian present in process, and it’s a few weeks away.
The New York Times has a pretty straightforward editorial outlining possible ways of managing the problem. One is to simply continue subsidizing rents. Another is to revive the 2008 National Foreclosure Mitigation Counseling Program, which was designed to bail out people affected by the sub-primes crash.
Not a lot of information or movement are coming from the White House or the Senate. The matter is still under consideration, but time is running out. Failure to act quickly could do quite a lot of damage.
(This is to say nothing of the gigantic upheavals of people trying to find somewhere affordable to live, etc. The humanitarian aspect of this situation doesn’t bear thinking about.)
What can go wrong? Pretty much everything.
This is an extremely tricky situation:
1. Property owners are typically dependent on the cashflow from properties. Their own debts are often serviced by these payments.
2. Banks and property market lenders have a lot of skin in the game in their portfolios of mortgages. A major downturn of mortgage failures could hit them very hard and force massive write-downs.
3. If they have to write down, their own asset base, on which they borrow, will be hit with higher costs for loans.
4. The higher costs will be passed on to borrowers in a very weak market.
5. Nothing happens fast when a borrower defaults. It’ll take time to recover any money from failed loans, in any scenario. Lenders could be in truly lousy positions.
6. The property market will be hit hard by the economic downturn anyway. Lack of money in the market will make it much worse.
7. Nominal capital values could be hit extremely hard by a comatose market. Sales will inevitably drop, as will prices. Even those able to capitalize on lower property prices will find themselves in a very static, stagnant, market which can’t do much about it. A White Elephant stampede, in fact, of properties that might be worth something sometime but not now.
8. Commercial properties were already in trouble with the Retail Extinction Event of the last few years. Their owners could literally be flattened by this added weight gravitating against “obsolete” property portfolios.
9. High rents are the typical first victims. Anything expensive outside the top of the market (the people who can actually afford those rents and mortgages) will get hit hardest, first. Places like New York and LA, with their notorious high baseline rents, could be in serious trouble.
This is real money getting pulled out of the economy into the black hole of unredeemed debt. The losses will be real, impacting the property market and probably forcing property owners to raise rents to compensate in the worst possible commercial environment.
The US property market is a massive asset base. If that asset base gets hit too hard, the entire economy is likely to be put under exceptional pressures. A weak cashflow is the last thing this very high maintenance sector needs in a recession.
Let’s leave out the politics for a change. The economic threat is quite real enough without political babble.
The facts are:
• Trashing 22% of America’s households cannot end well for anyone. If 2008 is any guide, it could also take a decade to recover.
• There are many billions of dollars’ worth of payments at stake which basically keep the property market running.
• It’s unclear whether there are any major corporate debt positions in the property market which could be like Bear Stearns in 2008, but it’s a possibility that can’t be ignored.
• A cascade of corporate failures based on a property market meltdown would trigger another major asset crash on the stock market, affecting the financial sector directly.
The bottom line is pretty clear – Whatever you’re going to do about it, do it now. Don’t wait. The real money losses could be truly astronomical. Debt situations could be totally unworkable, on multiple levels. There was $16 trillion of mortgage debt alone in the US in 2019. Rents would be a similar proportion of net values. That sort of money could leave a serious burn on the entire economy. Get it right, and get it happening.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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