The Future of Metro East IL Housing Market 2022

With all the housing predictions going on right now, how does one plan for their future? Do you Buy, Sell, Hold, or Invest in the St. Louis Metro East Illinois housing market?

With life starting to get back to normal after the pandemic, I believe five things will happen, beginning with 2021, rolling through 2022, and possibly beyond.

Buy, Sell, Hold, or Invest for 2022

1. Forbearance Ends in 2021

2. Illinois Eviction Moratorium to End August 2021

3. Home Prices to Peak 2022

4. Renter Nation Kick-Off

5. Rise of Interest Rates

So here we go, starting with

#1 Forbearance Ends 2021

I see the mortgage forbearance ending in 2021. It’s been booted around enough, extension after extension, but I don’t see them kicking it into 2022.

I believe this is because all COVID-19 positivity rates are going way down, and more people are getting vaccinated and returning to work. As a result, businesses are re-opening, life is starting to get back to normal, and things are getting comfortable.

With the state of Illinois fully opened as of June 11 and the updated order removing masks in most settings, the end of the pandemic could be near. I don’t see any reason for this forbearance to be booted into 2022. We’ll start seeing these emergency protections for homeowners begin to wind down this fall.

However, this will depend on how delinquent homeowners are on their mortgages and whether the lenders have the tools, time, and willingness to work with these homeowners. Either way, there are a lot of people that will have to pay.

With 70% of the FHA, VA, USDA, Freddie Mac, and Fannie Mae Loans in forbearance, many people will have to deal with that. Some of this is going to trickle into 2022. And they will have to show that they have a new source of income and a job because these are loan modifications or refinances, which are based on people’s ability to pay in the future.

So, this is going to happen in one of two ways.

1. People will either stay in their homes and work things out with the lender.

2. They will have to sell some of these homes or foreclose.

As home prices have risen, some may get lucky with selling and receive enough money to pay back some of this money that is now in forbearance.

On a side note, foreclosure activity continues to increase despite the government moratorium.

Illinois was among the hardest hit by the COVID-19 downturn and state-mandated lockdowns in 2020. Illinois already had a large number of underwater homes and the second-highest foreclosure rate in the country as of February 2020. (Chicago metropolitan area had the largest share of homeowners delinquent on their mortgages) (Illinoispolicy.org 5/14/21)

I know there’s a lot of conflicting information here. However, this is obviously a huge issue, and I think you should dig deeper into this. Our country will have billions and billions of dollars of unpaid mortgages that will trickle into the U.S. economy one way or another.

#2 Illinois Eviction Moratorium to End August 2021

The second thing I believe is the Illinois Eviction Moratorium will also end in 2021. This also has been booted a few times as well.

According to the Illinois Department of Human Services information, an estimated 60,000 Illinois households will be vulnerable to eviction in 2021 due to the pandemic.

When the moratorium ends, landlords will have the opportunity to collect that rent if the renter can pay it, or the landlords will be legally able to take back possession of their property through the proper eviction process. So, there will be lots and lots of movement in the rental category when the eviction moratorium ends.

With both the forbearance and the eviction moratorium phasing out, I believe we will see both demand and supply issues. In addition, local courts are going to be flooded with evictions, and it’s going to put a massive strain on our court system.

 

The mortgage delinquency rate has nearly doubled to 8.36%, only outpaced by the rate during the Great Recession. Illinois’ mortgage delinquency rate peaked at 11% during the Great Recession, the worst housing crisis in decades.

#3 HOME PRICES TO PEAK 2022

Much of this has to do with the forbearance ending and new inventory coming to the market. As a result, the affordability of the homes that people are living in today is challenging and will also come into play. And this is why I think home prices will peak in 2022.

Looking at this chart of homeownership rates across the United States from 1965 to 2020, you can see that we got really high in 2005. This was the start of the housing crash of 2007, 2008 & 2009. Then homeownership starts going down, down, down, and this is very favorable for renters. Generally, when people are falling out of houses, they go into rentals.

Homeownership in the United States was close to 69% in 2005 and dropped to nearly 63% in 2016. Every 1% is millions of people, so that’s a massive drop.

[You can see this at the St. Louis Fed.]

We are seeing this same thing happen during the 2020 pandemic. The homeownership rate in 2018 shows just under 65% gets up to 68% in 2020, which means approximately 3 million people became homeowners. Then it starts to reverse, falling just above 65% and putting people back into rentals.

The Homeownership Rate for Illinois peaked in 2004 during the start of the housing crash at 72.7% and then falls to 65.1% in 2019.

Homeownership Rate for Madison County, IL peaked in 2010 at 76.5% and fell to 72.7% in 2015 and started a slow climb right before the pandemic of 2020.

 

These are massive declines in U.S. and local homeownership rates!

#4 RENTER NATION KICK-OFF

I believe that we are heading into a renter’s nation, and the pandemic kicked it into gear. As a result, American homeownership is plunging and likely to continue gaining steam.

This is an area that doesn’t get much talk, but this happened in 2008.

When homeownership got up to 69% and fell to 63%, it put massive pressure on rentals. That’s what inspired all of this investor housing activity. Because without renters, you do not have investor housing. Even with the crazy housing prices right now due to this pent-up supply, this is teeing up to happen again.

The total Households in the state of Illinois is 4,830,038, with a rental rate of 34% (1,641,003). Madison County shows households at 107,413 with a rental rate of 29%. You can see this information at the National Low-Income Housing Coalition.

 

Look at this report by Freddie Mac. “One of the Most Important Challenges our Industry will Face: “The Significant Shortage of Starter Homes.”

Adding to the shortage of housing supply is the lack of new construction homes entering the market. The increase in construction development, materials, and shortage of skilled labor are the main reasons for this lower level of housing production. Within the same report, even before the COVID-19 pandemic and the current recession, the housing market in the United States as a whole was facing a substantial supply shortage.

They estimated a supply shortage of approximately 2.5 million units in 2018. They further estimate that the housing shortage will increase to 3.8 million units by the end of 2020.

According to the chart below, Illinois already has a deficiency of 268,089 in affordable rental homes. That’s a lot of people with no place to live, and it’s only going to get worse. You can view the pdf here: Link

This isn’t good, guys; this means that there is not going to be enough supply for the demand, and it’s going to drive all these rents up.

Housing demands typically decline in a recession, but this doesn’t appear to be the case for multiple reasons. As a result of the pandemic, people were not putting their houses on the market; people were not being able to trade up because now they would be trading into something lesser. With the forbearance and all these eviction issues coming into play, we are not going to have a decline in housing demand.

You can find more of this information from Freddie Mac by going to their website and reading the entire report, and following this for yourself.

Now it’s time to talk about the millennials and how they will play into the housing market.

These millennials were born between 1981 and 1996. About 4.8 million millennials are turning 30 in 2021, and many are expected to be dominant participants in the home-buying game. Unfortunately, this wave of new buyers is going to experience not being able to afford a home within their budget because of these surging prices, and these affordability issues will shove people into rental housing.

The cool part about it as a landlord, millennials have been in the workforce for a while and have jobs, careers, and cash. And I believe they will be forced to rent (which is not necessarily good) into rental housing until they can afford something.

We have seen rental rates climb over the past 10 years, and they are definitely going to go up over the next 10 years. And this, of course, all comes down to supply. As a landlord, we will definitely not see the supply or rental housing meet this demand. And what will happen is we will see individual rental increases in all these respective markets.

Illinois has the 42nd highest rent in the country. Although fair market rents vary, rentdata.org shows a ballpark estimate for a 2-3 bedroom home in Madison County, IL, as $938 – $1,224 per month.

Single-family and moderate-income apartments are where the big demand is. So, pick your market selectively.

#5 RISE OF INTEREST RATES

This is an important topic. There are guessing and mixed messages about when and if higher interest rates will return. A lot of investors have already started backing off with the view that the Federal Reserve could raise rates in late 2022.

Both Janet Yellen (U.S. Treasury Secretary) and Jerome Powell (Feds) have hinted that we might be seeing higher economic interest rates to tamp down inflation. Market Watch May 4, 2021

[The Fed doesn’t plan on raising interest rates until 2023.]-thebalance.com 7/6/21.

Why do I believe there are definitely higher rates headed our way? The Fed generally raises interest rates to cool an overheating economy and maintain inflation (the rise in the price of goods and services) to a reasonable level; this, in turn, creates a ripple effect across the entire economy. And, with an improving economy and over one-third of the nation’s adults being vaccinated, it seems more a question of “when” than “if.” But unfortunately, when this happens, it will create affordability issues in the form of rent, and things will slow down.

We have already seen the slowing down of new construction due to soaring lumber prices. The constant rising prices have the builders adding construction price contingencies in their contracts because there is no way they can absorb these costs. A buyer agreeing to these terms could prove costly down the road. [Forbes Advisor]

The last thing our housing market needs right now is the shortfall in affordable new construction, which impedes housing and economic growth. Check this statement out by the National Association of Home Builders. Due to these rocketing lumber prices, they’ve added $35,872 to one new construction home.

These builders have been handcuffed, it is way too expensive for them to help in solving the housing shortage.

When the Federal Reserve is saying that they are going to increase rates, you have to protect yourself from future rate increases and fix that rate! You want to know that your rates are going to be 2.8% or 3% in 10 years from now when they do start increasing the rates. You don’t ever want to get rid of that loan. Make sure you fix this rate!

All that stuff that I just went over is definitely going to happen, we just don’t know exactly when. Because of course, the government can throw more money at this and kick it even further down the road.

There are basically four opportunities that you can do.

1. Cost to Build vs Cost to Buy

• If the cost to build is significantly more than the cost to buy, then you might want to buy, especially if you’re going to get the same amount of rental income.

2. Supply vs Demand (Rental Rates)

• If occupancy is really high in an area or about ready to be high (because of an area that is growing), then that means your rental demand is going to be there.
• It may be hard to buy these properties because investors and rental companies have already started buying up these properties.
• However, you will see rental rates rise because people are buying properties as investments and renting them for the long term.

3. Follow the people (Where the people are moving to.)

• Go where the people are. You are going to see the rental rates go up in those areas, and you want to take advantage of the strong renters’ nation that’s coming.

4. Cash Flow vs Capital Gains (Not the time to flip & sell!!)

• This is the time to take advantage of the low-interest rates and hold onto the property. Whatever you buy over the long-term is going to put cash in your pocket. You want to use the rental rates to be building passive income and create cash flow.
• With the supply of housing being low, I believe this is not a good time to fix and flip a property.

Good News for Real Estate Investors

Significant changes are happening in the rental market, creating a surging demand for renting. As long as would-be home buyers hold back, and the current behavior patterns of the millennials, the renting lifestyle is assured of gaining ground.

Buy Real Estate Responsibly. Remember to consult a financial professional before making any significant financial decision.

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