Zillow Market Pulse: September 2, 2020

September 2, 2020

The Fed now owns almost a third of outstanding agency mortgage bonds. A newly-announced emergency eviction moratorium will protect many renters through the end of 2020. But rising rates of retail evictions offer a preview of what it could look like when protections expire.

The Federal Reserve owns 30% of all outstanding agency mortgage bonds

• The Fed has purchased $1 trillion in mortgage bonds since March.
• The purchases have helped to stabilize the mortgage market and keep interest rates in check.

Millions of renters granted eviction protections through the end of the year

• The CDC took an emergency action suspending evictions through December 2020 of renters who have suffered financially due to the pandemic.
• The order does not explicitly state what is expected of renters once the protection expires.

Retail evictions mounting as commercial tenant protections expire

• Evictions of retail tenants both large and small have accelerated of late, according to the Wall Street Journal.
• The hospitality and entertainment sectors have also seen an uptick in evictions.

So what? 

The Federal Reserve has taken a series of bold, unprecedented actions since the Spring with the goal of keeping money moving through the economy — including cutting overnight interest rates to zero, providing direct support to private firms and fundamentally shifting policy mandates. It has also essentially removed any limits placed on its program of mortgage bond purchases, known as Quantitative Easing. The results of this seemingly limitless purchasing program are now coming to light. The Fed has purchased about $1 trillion in mortgage bonds and now owns about 30% of all outstanding agency mortgage bonds. Despite its seemingly bloated size, analysts said they believe the Fed's purchasing program is sustainable. The program has brought stability to the mortgage market, keeping spreads between Treasurys and bond yields in check and the market for mortgages performing with some level of consistency. The Fed's actions, and the market activity they have prompted, have also helped place downward pressure on mortgage rates, helping fuel a strong recovery in the housing market.

Emergency action taken by the Centers for Disease Control and Prevention (CDC) aimed at protecting renters from eviction was undoubtedly welcome news for millions who were unsure of their fate going forward. The new order is an extension of the since-expired eviction ban included as part of the CARES Act, and offers protection to all renters – not just those living in homes financed with government-backed mortgages – so long as they meet certain criteria pertaining to their household finances and other factors. Much like last week's announcement by the FHFA, the new order extends the ban on evictions to the end of 2020. But while some are hailing the new directive, others are exercising more caution, citing concerns about its long-term impact. The measure does not offer any clarity into how quickly renters will have to pay back rent once protection expires, and it does not contain any explicit protections for landlords already suffering a notable downturn in revenue. According to property management screening firm Rentec Direct, landlords collected 29% less rent in the first ten days of August compared to in the first ten days of March.

Evidence of the difficulties surrounding evictions and the expiration of moratoriums can be found in the commercial real estate space. While bans on residential evictions have been extended, most state-level restrictions on evicting commercial tenants have recently expired. As a result, eviction proceedings are picking up, particularly in the retail space. A report from the Wall Street Journal outlines a series of cases in which landlords, both big and small, around the country are evicting their tenants who owe rent and with whom they haven't been able to agree to a modified lease, with the apparel, fitness and theater sectors bearing much of the brunt. The uptick in evictions in the generally less-regulated commercial space likely illustrates the challenges that could be faced by residential renters and owners that are financed by mortgages that are not guaranteed by government agencies (30% of all outstanding mortgages). One-size-fits-all protection plans are difficult to craft and enforce.

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