End of Forbearance and Moratoriums to Have Limited Impact on Shelter Inflation

Summary

• Renter evictions will likely increase after the moratorium ends on 30 June. But evictions tend to lower rents, since under 20% of evicted renters move to another permanent home.
• The foreclosure moratorium and mortgage forbearance also end on 30 June. But homeowner evictions will likely see a limited increase due to a strong housing market, a steady recovery, and the length of foreclosure proceedings.
• The precedent of the GFC shows falling, not rising, shelter inflation is more likely after high evictions.

Market Consequences

• Lower nominal yields.

Rents and OER Tend to Move in Sync

Shelter costs have the highest weight of all items in the CPI basket. They comprise mainly rent and owners’ equivalent rent (OER), with the latter compiled by asking owners how much they think their home would rent for. The share of rent and OER in shelter costs reflects urban households’ ownership status, with about two thirds owning their homes.

OER and rent indices tend to track closely. But over the past two decades, rent costs have typically increased faster than OER. Since 2000, the ratio of rent to OER has risen over 10% (Chart 1). The trend has reversed during the pandemic, possibly due to the donut effect: ‘real estate demand has moved from central business districts towards lower-density suburban zip codes with cheaper rents’.

Rents change infrequently. Therefore, the BLS collects data from each sample unit every six months. The rent sample is split into six panels, and data is collected from each panel twice a year at staggered six-month intervals. Rent and OER indices therefore tend to pick up market turns with a lag.

Renter Evictions to Normalize Post Moratorium and Weigh Down Rents

The CDC’s and most states’ mandated eviction moratoriums expire on 30 June (DC, Hawaii, Maryland, New Jersey, New York, and Vermont eviction moratoriums will expire later in the summer). An increase in evictions somewhat above pre-pandemic levels is likely, according to Eviction Institute data on eviction filings. Since the start of the moratorium in March 2020, filings have fallen to under half pre-pandemic levels. The end of the moratorium will therefore likely see some normalization.

Large-scale renter evictions translate into lower demand for rental. A study by the Washington state Women’s Commission found that only 12.5% of evicted tenants moved directly to another permanent home; 37.5% ended up living on the streets; 25% moved into shelter or transitional housing; and 25% moved in with family or friends. 80% reported being denied new housing due to their past evictions.

Renter eviction will therefore likely negatively, not positively, impact shelter.

Homeowner Evictions Will Rise, but Have Limited Impact on Inflation

The foreclosure moratorium and the mortgage payments forbearance on federally backed mortgages (about 80% of all household mortgages) expire on 30 June. At the same time, borrowers who entered forbearance before 30 June 2020 will be able to request six additional months of payment forbearance.

I expect only a limited increase in homeowner evictions over the remainder of the year for the following reasons: foreclosing takes time; the performance of the 7.2mn homeowners who have been in the pandemic-related forbearance plan since March 2020 has been strong; strengthening labour market and low mortgage rates suggest forbearance and delinquencies will decrease further; and regulators will likely push lenders to extend debt forbearance further.

The impact of homeowner evictions on shelter cost is more ambiguous than that of renter eviction. This is because most evicted former owners are likely to move into rental properties. The 2011 Fed study found that two years after foreclosure, 98% of evicted homeowners no longer owned a house. It also found that foreclosures did not reduce much shelter consumption (i.e., housing size, amenities, neighbourhood quality) of the evicted owners. Homeowners tend to be better off than renters, and therefore evictions impact their consumption less. Yet during the GFC, large foreclosures and evictions saw shelter inflation collapse.

Precedent Suggests Shelter Inflation Is Unlikely to Rise

The GFC precedent suggests the coming end of the debt forbearance and eviction moratoriums is unlikely to raise shelter inflation. First, as mentioned above, renter evictions tend to lower rather than increase shelter costs. Second, homeowner evictions will likely be less than during the GFC. Third, despite record evictions during the GFC, both the rent and OER indices contracted.

Overall, the end of the moratorium and debt forbearance on 30 June adds more downside than upside risks to inflation, though these are limited. On the margin, it also adds downside risks to growth: I continue to expect a slowdown over the remainder of the year as the end of government benefits and higher inflation are unlikely to be offset by higher wage income. This suggests fading any curve steepening.