As Covid-19 infection rates spike to their highest levels to date, three promising vaccines in development are providing flecks of hope in what would otherwise be a bleak horizon. Although initial doses could be available as early as December, the vaccines are not expected to be administered on a widespread basis until Spring or Summer.
Despite government mandated lock-downs and travel restrictions aimed to combat the spread of Covid-19, the stock markets have popped on the news of these vaccines. And while we are all hoping for a V-shaped economic recovery, it remains unclear how swiftly the world can emerge from the economic damage that’s been wrought.
The lockdowns and restrictions have put millions of Americans out of work, and many of those millions struggle to afford staying in their homes. The plight for many is all the more aggravated by expiring federal pandemic economic assistance which provided income to gig workers (the PEUC program) or where the state benefits were exhausted (federal PUA benefits).
In today’s piece, I look at the impact of Covid-19 on residential real estate and some ideas—legal and otherwise—for renters and homeowners to endure this Winter-of-Covid and stay in their homes.
Relief for Renters: the CDC’s moratorium on evictions.
In early September, the CDC issued a moratorium on residential evictions—months after similar edicts were issued in New York and other states and municipalities around the country. The CDC issued the order (the “Order”) (See 85 FR 55292) claiming that stopping evictions would inhibit the spread of Covid-19.
Legal Criticisms of the CDC Order
The Order was immediately criticized by landlords who argue that the CDC is over-stepping its authority, and that the measure’s true intent is not to address Covid-19, but it is actually a veiled form of economic relief. Critics further contend that the Order unfairly burdens landlords with carrying the cost of the ‘relief’ insomuch as they are prohibited from filling their units with rent-paying-tenants but must still bear the expenses of owning and operating the property.
In support of their case, the critics point out that the law upon which the CDC’s authority is based clearly suggests that the CDC’s purview is limited to activities related to the eradication of pathogens (e.g. fumigation, disinfection, sanitation, pest extermination, and destruction of animals or articles believed to be sources of infection (See 42 CFR §70.2 and 42 USC §264)).
The Order is Tested in Court
Still, the Order has withstood some early legal challenges, including a federal lawsuit brought in Georgia. (See Richard Lee Brown, et al. v. Secretary Alex Azar, et al.) In that case, a federal judge denied a preliminary injunction sought by the plaintiff-landlords. The court was unpersuaded that the CDC lacked the authority to issue the Order.
The court was also not persuaded by the landlord’s argument that the Order was “arbitrary and capricious”. (In order for a court to overturn an administrative decision, the party challenging the decision must meet a very high standard by showing that the decision had no plausible or logical basis to support it—i.e. that it was “arbitrary and capricious”.)
The constitutionality of the CDC’s authority may be legitimately questioned. One can fairly ask: what can the CDC not regulate in the name of stopping Covid-19?
But the court likely got it right in terms of the ‘arbitrary and capricious’ issue. Research by epidemiologist Michael Levy, at the University of Pennsylvania, looks at the potential effect of evictions on the spread of Covid-19. Levy’s model, based in part on the premise that when tenants are evicted, they frequently move in with other family members, thereby increasing the size of households and the likelihood for viral transmission, predicts that evictions will raise the number of infections. His model predicts that the country would incur approximately 1 death for every 60 evictions.
Regardless of the Order’s legality, it effectively provides nationwide relief, allowing close to 40 million struggling tenants to stay in their homes through the rest of the year. But absent an extension beyond then, or other remedial measures, it could be an altogether un-happy new year for many renters come January 1.
The Rent is Still Due!
And while the CDC Order prevents a tenant from being evicted, it does nothing to affect the rent. The rent still accrues and the tenant remains responsible to pay it, and a landlord can go to court to seek a money judgment against the tenant to collect it.
Special note to landlords: maintain your building in accordance with accepted safety protocols (e.g. social distancing, PPE use, sanitizing), lest you risk tenants asserting rent is not payable because you have breached the lease’s “warranty of habitability” , which obligates a landlord to keep the premises safe and fit to live in.
Special note to renters: re-read the “Special note to landlords” above, and, if worse comes to worst, past due rent can be discharged as unsecured debt under Chapter 7 bankruptcy.
Mortgage Forbearance for Residential Mortgages
One part of the CARES Act passed in March requires banks to offer mortgage forbearance programs to distressed borrowers. The programs permit struggling homeowners to temporarily postpone or avoid mortgage payments for an initial term of 6 months, with the possibility of extending the term to one year. While many of the initial 6-month term programs expired in September, many other arrangements were renewed for a second 6-month term and are extended until Spring 2021.
The good news is that the number of mortgages in forbearance has been steadily declining since its peak in late Spring. In May, there were 4.7 million mortgages (or 8.8% of all mortgages) in forbearance, and as of November 18, there are approximately 2.7 million mortgages (or 5.5% of all mortgages) in forbearance.
The bad news is that there are still close to 3 million Americans who can’t afford their homes and, unless things change dramatically, may be forced to sell their homes this upcoming Spring.
Home Prices Stable, Despite a Bad Economy
For most of the pandemic, and despite historically high unemployment and an unsettled economy, housing prices generally (and especially outside of cities) have been stable or rising. It’s speculated by industry experts that the forbearance programs have been a factor behind this phenomenon. The economics and logic being that: the inventory of homes for sale (i.e. the supply) has been kept low because distressed borrowers are able to stay in their homes, when, under normal circumstances, those houses would be for sale—either by a distressed mortgagor or via bank foreclosure.
What Comes Spring?
This begs the question: what will happen in the Spring when the year-long forbearance programs expire? Some experts are predicting a supply glut that will put downward pressure on housing prices.
Others disagree, however, and draw distinctions from the last real estate crash over a decade ago. The real estate crash and recession of 2008—fueled largely by subprime mortgage lending— was characterized by a glut of housing inventory, falling prices, and borrowers holding negative equity (a/k/a they were ‘underwater’). (Note: when a homeowner is ‘underwater’—that is, they have negative equity and owe more on their home than it is worth—defaulting on the mortgage and abandoning the home can make financial sense.)
Today, however, home prices in some locales are rising and many homeowners hold significant positive equity. In addition, unlike the surfeit of homes in the last crash, today we have an inventory shortage, and that supply shortage, coupled with low interest rates—which, all things being equal, would bolster demand as ownership becomes more accessible—may continue to support prices.
An Expert's Perspective
Still, some real estate professionals view the situation as more complex, with interplay of commercial and residential properties as well as tenant-occupied rental properties. Randy Reis of eXp Realty NYC explains how remote work and empty rental units will weigh on NYC real estate prices, including residential, for years to come.
Says Reis: “I think it's a tale of two markets. High priced, proximal to Manhattan or in Manhattan have gotten hit the most, while sub $1,000,000 properties in the outer neighborhoods of the outer boroughs have enjoyed a surge in pricing, where low rates have caused bidding wars to erupt everywhere. I think that this trend will continue for a while as I believe there is an overhang of evictions yet to come, and further pricing pressure on Manhattan properties.”
Reis adds: “Because of the Covid-19, with amazing speed, so much of the compelling reasons for city living—like restaurants and culture—disappeared. In Manhattan, many of the younger residents of shared units have simply left. With a job loss or a work from home edict in place, the reasons for being in the city have diminished. The word is that the number of apartments that are not generating revenue is significant as evictions have been tabled until January, and as that has been extended multiple times, it probably will be again. Until those evictions happen, and the units become filled (at lower rents), and the weak holders of these buildings sell out (at lower prices) to stronger hands, we appear to be in a cyclical trend downward in value for city dwellings.”
A bearish but candid view from a die-hard, Brooklyn-born New Yorker.
Options for the Distressed Borrower
Selling the Residence to Capture Positive Equity
Macro-analysis aside, the best option for a distressed homeowner with inadequate means to pay their mortgage—and no option for forbearance—may be to sell the property and capture whatever equity they can. But borrowers are advised to exhaust all options with the lender first, before going this route.
Alternatively, a homeowner with reduced but sustainable income may be able to refinance at a lower interest rate, thereby lowering their monthly mortgage payments to an affordable level. As of today, 30-year fixed mortgage refinance rates hover around 3%. (Refinancing might save you money even if your secure in your housing situation.)
A Novel Alternative
Some Wall Street-backed firms are touting a third, rather unconventional, alternative to keep homeowners in their home by employing a transaction known as the “sale-leaseback”.
In a sale-leaseback model, the owner sells the property and simultaneously leases it back from the purchaser. (Of course, the ‘homeowner’ is then no longer an owner and becomes a tenant.)
The sale-leaseback model is common in commercial real estate, but is now gaining popularity in the residential markets. Similar in concept to the more regulated “reverse mortgage” , the sale-leaseback can enable a homeowner who is house-rich, but cash-poor, to stay in their home while accessing its equity. Some programs even offer the seller a repurchase-option which gives the seller the right to purchase the home back from the new landlord/owner.
Easyknock Inc., a player in this field since 2016, was originally targeting homeowners sitting on lots of equity in good times. But since Covid-19, they’ve found a new target: the distressed homeowner with positive equity facing an expiring forbearance program. Although unconventional, the sale lease-back may be an alternative worth investigating to stay in your home.
If you are facing eviction for unpaid rent, try to work out an arrangement with the landlord to avoid eviction. The eviction process can be unpleasant and ugly for both sides. If you settle for paying a portion of the rent, have it documented and signed by the landlord, and make sure you’re released from past arrears so that the landlord cannot renege and seek the full rent at a later date.
If refinancing is not a feasible option, and you’re forced to sell your home, engage an attorney early in the sale process in order to help negotiate the best deal possible.
If you’re considering a sale-leaseback program, you are well-advised to consult an attorney. Given the complexity of the transactions—i.e. the sale and lease of real property coupled with a repurchase option— an attorney should review the documentation and advise on the risks, contingencies, and your legal rights and obligations. Almost certainly the terms of these contracts will be drafted to protect the interests of the purchaser, not the interests of the selling-homeowner.
Home is a special place. I sincerely hope that you have no use for any of the information I've discussed herein. Kind regards and Happy Thanksgiving.
"Reflect upon your present blessings, of which every man has plenty; not on your past misfortunes, of which all men have some." — Charles Dickens
Special thanks to Randy Reis for his insights. Randy is the founder of the ReisNYC Team at eXp Realty, comprised of 5 agents transacting residential business in Manhattan, Brooklyn & Queens, and he heads an organization of over 500 agents in 25 states and 2 Canadian provinces. Randy has been a real estate investor since 1983 and spent 25 years as a member of the American Stock Exchange where he founded Philanna Capital, an option market making firm. Randy can be reached at (917) 435-4870, email@example.com, or www.reisnyc.com.
If you found this article interesting, feel free to share it with a friend.