Sunday, July 26th, 2020
In my previous blogs, I have discussed the impact of a demographic shift from NYC to the Hudson Valley on the real estate market, the need to expand housing options, and the synergies between housing and economic development. This week I am focusing on the Housing Cost Burden for homeowners as it relates to potential foreclosure.
The history of the “Housing Bubble” and subsequent crash 12 years ago is well known. The housing crash resulted in many foreclosures across the country and New York State. Counties in the lower- and mid-Hudson Valley regions were hit very hard.
Prior to the housing crash, homebuyers had taken advantage of the low interest rates and dreamt of seeing their investment continue to rise. However, thousands of homeowners fell victim to predatory lending and were taken advantage of by unscrupulous lenders. Many buyers purchased homes above their means. There were many cases of homeowners refinancing their existing mortgage at a lower rate and subsequently took cash out against the rising value of their home. Some owners used the increased value of their home as a personal ATM and purchased luxury items, while others used the value to send their kids to college.
Regardless of how the money was used – when the market crashed these owners found themselves facing a financial situation of being “underwater” in their mortgage. Underwater is a term used in the real estate industry when a homeowner’s mortgage is more than the value of the property.
As the economy fell into the Great Recession, the cost of living, which includes housing expenses (mortgage, taxes, insurance), rose and wages did not keep pace with inflation. Many people lost their jobs during the Great Recession and the housing bubble burst. Housing prices plummeted as the inventory of homes on the market skyrocketed. According to the NYS Unified Court System – foreclosure filings peaked in 2009 and then again in 2013. There were some government programs designed to keep people in their homes, but many still fell into foreclosure.
Some of the hardest hit homeowners were those with incomes less than the Area Median Income (AMI). These families had qualified for the purchase of the home at the time of the sale. Specifically, homeowners with income levels between 50% and 80% of the AMI were vulnerable to foreclosure with a significant loss of income. Furthermore, households with income between 80% and 100% of the AMI were also susceptible to losing their home when finances became strained.
I previously provided information on families having a housing cost burden, which is the ratio of housing costs to household income. A home is considered affordable when the monthly housing costs are no more than 30% of the household monthly income. When the monthly housing costs are more than 30% it is considered a cost burdened and when it is more than 50% the household is severely cost burdened. For owners, housing costs includes mortgage payment, utilities, association fees, insurance, and real estate taxes.
During times of economic crisis, as wages decline, households become more vulnerable to falling behind on their mortgage and other household expenses directly related to homeownership. As wages fall – homeowners can become cost burdened and in some cases become severely cost burdened.
For purposes of this analysis – households categorized as cost burdened are “At-Risk” and severely cost burdened are “Severely At-Risk”. These levels of risk are used to describe the likelihood of falling behind with the costs related to owning a home. As the level of risk grows – so does the probability of foreclosure.
The chart provides the number and percentage of owners “At-Risk” and “Severely At-Risk” for each county in the Hudson Valley Region by income level. Overall, the Hudson Valley Region has 37,695 owners that fall into the “At-Risk” category and just over 23,000 who are “Severely At-Risk”.
The chart shows the percentage of owners at each level of risk, which is a percentage of the total number of homeowners in each county. For example, Columbia County has 18,335 homeowners, of which 1,080 or 5.9% are “At-Risk”. Dutchess County has the largest percentage of owners “At-Risk”, 8.6%, while Westchester has the smallest percentage among the nine counties. Rockland County has the largest percentage of owners “Severely At-Risk”, 5.2% and Columbia County shows the smallest percentage of owners who are “Severely At-Risk” at 2.5%
Why Is This Important
All this to say – let’s learn from the past. However, let me be perfectly clear, I am NOT suggesting that all of these buyers made bad decisions. I am simply pointing out that there is a real risk to existing homeowners in the Hudson Valley.
Today’s real estate market is witnessing a limited supply of inventory, historically low interest rates (3% for a 30-year mortgage), and an increasing demand for homes, which is being fed by people leaving NYC. These factors are pushing home values up in our region, which can lead to the refinancing of an existing mortgage, and much like what occurred during the housing bubble, cashing out. Homeowners should be mindful of these factors and not repeat mistakes of the past.
