How Has Covid-19 Affected Renters and Homeowners?

How Has Covid-19 Affected Renters and Homeowners? Summary In this report, we look at how coronavirus disease 2019 (COVID-19) has affected renters and homeowners and how state and federal policies have helped to stabilize household finances for both groups. We find that the unprecedented actions of the state and federal governments to boost incomes and provide rental and mortgage relief have helped many households who otherwise would have faced an eviction or foreclosure avoid these destabilizing events. Despite these actions, many households continue to struggle financially due to the effects of COVID-19. In particular, low-wage workers were in a precarious financial position before the pandemic, and tend to work in industries that were most affected by the pandemic. These workers are likely to rent, rather than own, their home. As a result, there has been significant interest in how the pandemic has affected renters, especially how much rental debt has accumulated in California due to COVID-19. To help answer this question, we collaborated with researchers from the Federal Reserve Bank of Philadelphia to update their recent national assessment of rental debt to more accurately reflect economic conditions and policies in California. In this report, we present the findings of our collaboration. Our revised analysis estimates that California renters owe $400 million in unpaid rent, down from $1.7 billion estimated for California in the nationwide analysis, as of December 2020. Our analysis does not estimate the amount of underlying rental debt that existed prior to March 2020 due to the state’s longstanding housing affordability challenges, nor do we forecast how state and federal policy changes would affect the accumulation of rental debt in the future. GABRIEL PETEK LEGISLATIVE ANALYST JANUARY 2021 analysis full gutter AN LAO REPORT INTRODUCTION With the emergence of COVID-19, the state This report does not address the state’s economy abruptly ground to a halt in the spring of underlying housing affordability challenges. 2020. While the state economy has experienced Addressing California’s housing crisis is one of a modest rebound since that time, the pandemic the most difficult challenges facing the state’s continues to disrupt the lives of all Californians policy makers. Millions of Californians struggled in small and large ways, from changing how we to find housing that was affordable before the interact in our communities to the way we work. pandemic. The crisis is a long time in the making, However, for many, including the 1.4 million the culmination of decades of shortfalls in housing Californians who remain out of work, the effects construction. Just as the housing affordability of COVID-19 have been more dire. In this report, crisis has taken decades to develop, it will take we look at how the pandemic has affected renters years or decades to correct. We hope that by and homeowners and how state and federal shedding light on how COVID-19 has added to the policies have helped to stabilize household financial stress of renters, we can inform policy finances for both groups, preventing many solutions to help renters through this crisis. In households from experiencing rental evictions particular, the state and local governments will and mortgage delinquencies. We also provide an soon have to determine how to allocate recently updated estimate of the total unpaid rental debt in authorized federal funding for emergency rental California—taking into account state and federal assistance. Beyond this crisis, continued work will steps to stabilize household finances—that has be necessary to address the state’s underlying accumulated due to COVID-19. housing affordability challenges. LOOKING BACK AT 2020: HOMEOWNERS AND RENTERS DURING COVID-19 The Economic Consequences of COVID-19 have faced higher rates of job loss during the Have Been Widespread... In a matter of weeks, pandemic. This is because job losses have been 2.6 million Californians and 22 million people concentrated among lower-wage workers who nationally lost work due to the onset of the are much more likely to rent than higher-wage pandemic. Many observers, including our office, workers. As shown in Figure 1 on the next feared that a large number of these households page, nearly 80 percent of households with less would fall behind on rent or mortgage payments, than $50,000 in annual earnings rent, whereas leading to evictions and foreclosures. only 28 percent of households with more than …But Renters Have Been Disproportionately $150,000 in annual earnings rent. As shown in Affected. Even before the pandemic, the high Figure 2 on the next page, more than half of cost of housing in California placed renter workers who have lost their jobs are members of households in a precarious position, particularly lower-income households (less than $50,000 in the 1.5 million low-income households who paid annual earnings). The estimated unemployment at least half of their income toward housing. rate for workers in lower-income households A pandemic-induced job loss adds further (15 percent) is five times higher than the estimated financial stress to these households. Due to the unemployment rate for workers in higher-income composition of the industries and occupations households (3 percent). most affected by public health restrictions and State Actions and Federal Stimulus declining economic activity, renter households Quickly Helped Stabilize Finances for Most 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Households… Very quickly after the pandemic …As a Result, Many Households Have Been declaration, the state and federal governments Able to Avoid Evictions and Delinquencies. Due took unprecedented steps to boost households’ to the unprecedented steps to boost incomes incomes and provide rent and mortgage relief to and provide rental and mortgage relief, many households affected by COVID-19. In particular, households who otherwise would have faced several federal programs—such as expanded an eviction (or fallen behind on their rent) or unemployment insurance (UI) benefits and stimulus foreclosure (or fallen behind on the mortgage) checks—provided a significant boost to household have been able to avoid these destabilizing events. incomes throughout 2020. For workers who Despite these steps, some households—especially experienced a job loss during 2020, enhanced UI households headed by undocumented adults, who benefits during the spring and summer backfilled are ineligible for most federal stimulus programs, lost income by up to $1,050 per week. During and those who have not received UI benefits due the COVID-19 pandemic, the state has regularly to processing delays—undoubtedly continue to distributed $5 billion per week in UI benefits struggle financially due to the effects of COVID-19. ($100 million per week is typical during normal Below, we provide further details on how economic conditions). To date, the state has COVID-19 has affected renters and homeowners. distributed more than $115 billion in UI benefits to unemployed Figure 1 workers. As Figure 3 on the Lower-Income Households More Likely to Rent Their Home next page shows, because of Analysis Limited to Working Age Households increased federal stimulus and UI benefit payments, the total Household income Renters Owners income of California households was almost 10 percent higher in Less than $50,000 77% 23% the second and third quarters of $50,000 to $100,000 59% 41% 2020 than those same quarters in 2019. (Of course, many $100,000 to $150,000 43% 57% households earned less during this period but, on average, More than $150,000 28% 72% household incomes increased throughout the state due to federal stimulus programs.) Figure 2 Lower-Income Households Have Experienced More Job Losses During COVID-19 Analysis Limited to Working Age Adults Number of Share of all Household Income Estimated Unemployment Rate Unemployed Workers Unemployed Workers Less than $50,000 737,000 53% 15.1% $50,000 to $100,000 385,000 28% 7.2% $100,000 to $150,000 124,000 9% 4.1% More than $150,000 139,000 10% 3.3% 7.9% All Households 1.4 Million 100% COVID-19 = coronavirus disease 2019. www.lao.ca.gov 3 analysis full gutter AN LAO REPORT Figure 3 Recent Decline in Personal Income More Than Offset by Federal Stimulus (In Billions) Government Transfers $800 Personal Income Less Government Transfers 700 600 500 400 300 200 100 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 2020 Q2 2020 Q3 HOW HAS COVID-19 AFFECTED RENTERS AND RENTAL DEBT? Exact Amount of Unpaid Rent as a Result the pandemic, some households are estimated to of COVID-19 Pandemic Unknown. There has have insufficient income to pay monthly rent and been significant interest in how the pandemic has other nonhousing costs. Each month, rent debt affected renters, in particular, how much rental debt accumulates for these households. The analysis has accumulated in California due to COVID-19. found that about 5 percent of California renters Although the exact amount of unpaid rent in the (240,000 households) had accumulated unpaid rent state is unknown, researchers have attempted due to COVID-19. For households with rental debt, to estimate this amount to shed light on how the the average amount of unpaid rent was $7,000. In pandemic has affected renter households and total, the report found that California renters likely thereby help inform any policy response. would accrue a total of $1.7 billion in unpaid rent Initial National Analysis by Federal Reserve due to COVID-19 through December 2020. Bank of Philadelphia Estimated California LAO Collaborated With Federal Reserve Bank Renters Owe $1.7 Billion in Unpaid Rent. In of Philadelphia to Develop California-Specific October 2020, researchers at the Federal Reserve Estimate of Rental Debt. The Federal Reserve Bank of Philadelphia published a national analysis Bank of Philadelphia’s analysis calculates renter of rental debt due to COVID-19. The results of their debt nationwide, meaning that several underlying analysis were published in their report, Household assumptions are applied to renters in all states. Renter Debt During COVID-19. The national This is a reasonable approach when developing a model tracks households over the course of the complicated model that aims to identify the scope pandemic, adjusting monthly household income of rental debt nationally, as was the goal of the downward for job losses and upward for federal Federal Reserve Bank of Philadelphia. Naturally, this stimulus and UI benefits. Based on how these approach means that some assumptions may not households’ incomes change during the course of reflect the experience of a particular state. Mindful 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT of this, our office collaborated with researchers at to $2.2 billion. These adjustments were more than the Federal Reserve Bank of Philadelphia to adjust offset, however, by our office’s revised estimate key assumptions about (1) renter nonhousing costs, for UI benefits, which have represented a major (2) renter savings rates, and (3) statewide UI benefit income boost during the pandemic. Revising the amounts in their model to more accurately reflect UI participation rate upward to match state records economic conditions and policies in California. had the effect of reducing total unpaid renter debt Specifically, our office revised estimates for monthly due to COVID-19 from $2.2 billion to $400 million nonhousing costs upward to reflect California’s as of December 2020. Overall, the updated analysis high cost of living and revised savings downward to estimated that about 2 percent of California reflect that many low-income renters faced financial renters (90,000 households) had unpaid rent. For insecurity even before the pandemic. Next, we households with rental debt, the average amount of revised the model’s assumption that half of eligible unpaid rent was $4,500. unemployed workers receive UI benefits to match Lower Estimate of Unpaid Rent in California state UI benefit administrative records that show Appears Consistent With Data on On-Time Rent that a much higher share of workers have received Payments. The updated estimate that California UI benefits during the pandemic. The researchers renter households owe $400 million in unpaid at the Federal Reserve Bank of Philadelphia then rent due to COVID-19 may appear low given updated their analysis of rental debt in California the widespread economic consequences of the using our assumptions for these key inputs. (The pandemic. However, recent data on rent payment Appendix provides additional information about this timeliness suggest that the unprecedented federal methodology.) actions to boost incomes have helped many Updated Analysis Estimates That California renter households cover their rent. According to Renters Owe $400 Million in Unpaid Rent. Our a nationwide survey conducted by the National first two adjustments—revising nonhousing costs Multifamily Housing Council, shown in Figure 4, the up and savings down—had the effect of increasing share of rent payments that were on time during the estimate of total rental debt from $1.7 billion COVID-19 has been only slightly lower than the Figure 4 Share of On-Time Rent Payments During COVID-19 Almost Unchanged From 2019 Share of Rent Payments Made in Full by End of Month 100% 90 80 70 60 50 40 30 2019 20 2020 10 April May June July August September October November December National data from the National Multifamily Housing Council. COVID-19 = coronavirus disease 2019. www.lao.ca.gov 5 analysis full gutter AN LAO REPORT share made on time during the same month in due to a COVID-19-related hardship experienced 2019. between March 4, 2020 and August 31, 2020, Updated Estimate of Pandemic-Related if the tenant provides a declaration of hardship. Renter Debt Reflects Small Fraction of (Executive orders from the Governor and Judicial California Rent Payments… Households who Council rules offered renters eviction protections cannot make their rent payments clearly face during this period.) The law also specifies that for difficult choices. In the aggregate, however, the a COVID-19-related hardship that occurs later— model’s estimate of unpaid rent—$400 million due between September 1, 2020 and January 31, to COVID-19—represents a very small fraction of 2021—tenants must pay at least 25 percent of overall rent payments in the state, which likely total their rent due to avoid eviction. Tenants are still more than $100 billion annually. responsible for paying unpaid rents to landlords, but those unpaid amounts cannot be the basis for …But Only Accounts for COVID-Related an eviction. These protections are set to expire on Rental Debt. It is important to keep in mind January 31, 2021. The 2021-22 Governor’s Budget that renters already faced sizeable affordability identifies his desire to continue some type of challenges prior to the pandemic. For instance, eviction protection past January 31, 2021, however, prior to the pandemic, our office estimated the the budget does not provide details about an state would need to provide roughly $10 billion per extension of the eviction moratorium. year in renter assistance to ensure no low-income renter paid more than 50 percent of their monthly Recently Authorized Federal Funding For income in rent (a threshold often used to distinguish Emergency Rental Assistance. In late December those who are severely rent burdened). The initial, 2020, the federal government authorized $25 billion as well as the revised, model only estimates rental for emergency rental assistance. California is debt attributed to COVID-19. To reiterate, the estimated to receive $2.6 billion of that funding. model does not estimate the amount of underlying Local governments with populations over 200,000 rental debt that existed prior to March 2020, nor are eligible to receive a direct allocation from the does the model forecast how state and federal federal government to provide rental assistance. policy changes (specifically the expiration of Current estimates indicate the state government state and federal relief efforts) would affect the will receive $1.4 billion, while local governments will accumulation of rental debt in the future. receive $1.2 billion. Federal requirements provide some limitation on the use of this funding, including State and Federal Policy Changes that eligible households must have experienced Affecting Renters financial hardship due to COVID-19, be at risk of homelessness or housing instability, and have a Eviction Protections. In an effort to avert a household income at or below 80 percent of the worsening of the state’s housing crisis due to the area median. Eligible households can use these financial hardships experienced by Californians resources to address past-due rent and utility because of COVID-19, the Governor, Judicial payments, as well as future rental payments. While Council, and Legislature have adopted various federal requirements provide parameters for the use policies related to housing and homelessness of these funds, the state and local governments since the start of the pandemic. (While the federal have important decisions to make about how government issued national eviction protections, they will administer this funding to assist renters the state-based actions generally provided a higher that have accumulated rental debt because of the level of protection for renters from eviction.) Most pandemic. significant have been the eviction protections for renters provided by the Tenant, Homeowner, Going Forward and Small Landlord Relief and Stabilization Act Could Rental Debt Increase Going Forward? of 2020 (Chapter 37 of 2020 [AB 3088, Chiu]). Despite our revised analysis and recently authorized Under the legislation, no tenant can be evicted federal funding for emergency rental assistance, the before February 1, 2021 because of rent owed 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT actual amount of accrued rental debt is unknown. other hand, 1.4 million workers remain unemployed On the one hand, renter relief during COVID-19 and recent surges in the pandemic have resulted and recently enacted federal income assistance in a new round of tightened public health orders, should help many rental households avoid accruing which could have financial ramifications on additional rental debt going forward. Furthermore, renters and lead to further accrual of rental debt. although many renters remain out of work, the Moreover, the expiration of the eviction protections state economy has rebounded since April 2020, offered by AB 3088 at the end of January creates regaining more than 1 million out of the 2.6 million significant uncertainty for renters going forward. jobs that were lost in March and April 2020. As a Until the pandemic is behind us and jobs can fully result, many renters who were out of work earlier return, some renters may continue to accrue rental in the pandemic may now be working again and debt and face a risk of homelessness or housing able to stabilize their household finances. On the instability. HOW HAS COVID-19 AFFECTED HOMEOWNERS? Relative to renters, homeowners tend to be in Figure 5 shows that mortgage delinquencies higher income and hold greater savings and other among California homeowners remained low in assets, positioning them better to weather financial 2020. Specifically, 5 in every 1,000 California disruptions. Because of homeowners’ generally homeowners were more than 90-days late on stronger financial position and federal policy their mortgage during the third quarter of 2020. response to the pandemic, homeowners have This level is about even with the average level of fared relatively well during the pandemic compared delinquency from 2017 to 2019, and significantly to the concerns many observers held during the lower than the level during the last recession. first months of the pandemic. Throughout 2020, Why Have Delinquencies Remained Low? mortgage delinquencies remained very low, in As discussed earlier, federal actions to boost part because—as discussed earlier—job losses household incomes, as well as low unemployment have been less severe in jobs typically held by among higher-income workers (who are most likely homeowners and federal stimulus programs to be homeowners), have helped most homeowners have stabilized household budgets. Additionally, weather the downturn. For homeowners who for homeowners specifically, delinquencies have nevertheless were unable to make their payments, remained low due to a new federal relief program a federal forbearance program provided the option that allowed many homeowners to defer their mortgage payments Figure 5 for up to 12 months. Going Mortgage Delinquencies Remained Low During 2020 forward, while delinquencies likely will increase somewhat during 14% the spring and summer of 2021 12 as forbearance periods begin 10 expiring, we anticipate that many 8 borrowers will be able to continue making their mortgage payments 6 after their forbearance period 4 ends. 2 Mortgage Delinquency Remained Low in 2020. Credit 2005 2007 2009 2011 2013 2015 2017 2019 2020 report data compiled by the Federal Reserve and included www.lao.ca.gov 7 analysis full gutter AN LAO REPORT to defer mortgage payments to the end of their loan Bankers Association shows that about term. 30 percent of the 2 million U.S. homeowners Forbearance Programs Allowed Homeowners who have exited forbearance since June to Defer Payments to End of Loan. The federal continued to make their mortgage payments Coronavirus Aid, Relief, and Economic Security despite being in forbearance. (CARES) Act provides up to 12 months of loan • Employment Has Improved. Some borrowers forbearance for borrowers who have been affected who currently are in forbearance have by COVID-19. Mortgage payments are not made regained employment since the pandemic during forbearance. Borrowers have several options began and therefore are more likely to be for repaying mortgage payments not made during able to continue their payments. Although forbearance, including repaying them as regular the economic rebound had slowed in recent monthly payments at the end of the borrower’s loan months, the labor market has nevertheless term. A survey by the national Mortgage Bankers regained 1 million jobs since it hit bottom in Association estimates that about 5 percent of April 2020. all loans currently are in forbearance. According • Home Equity Has Risen. Monetary policy to the survey, 80 percent of these borrowers and guidance set by the Federal Reserve in requested forbearance during the first months of response to the pandemic helped to push the pandemic. down mortgage interest rates. As a result, Could Delinquencies Increase Going home values have risen considerably since Forward? The federal 12-month forbearance the start of the pandemic, creating additional guarantee will lapse this spring for borrowers who wealth for most California homeowners. Data requested assistance during the first months of from Freddie Mac suggests that very few (less the pandemic. However, not all borrowers who than 1 percent) of homeowners in forbearance requested forbearance will enter delinquency. For have negative equity—that is, they owe more several reasons, many forbearance borrowers likely than their home is worth. Negative equity is will be able to continue their mortgage payments a common risk factor of mortgages entering after forbearance. delinquency. • Not All Homeowners in Forbearance For the reasons stated above, while Have Missed Mortgage Payments. The delinquencies likely will increase somewhat during federal forbearance program is available the spring and summer of 2021, we anticipate to all borrowers, not only those who are that many forbearance borrowers will be able to unable to make their mortgage payments. continue making payments. Under federal law, borrowers do not need Acknowledgement to prove or document their inability to meet their mortgage payment. As a result, some We would like to thank the Federal Reserve Bank borrowers may have requested forbearance of Philadelphia and their research staff for sharing as a cautionary step and, after several months their expertise and collaborating with our office on of relief, may be able to continue making this work. payments. A survey from the Mortgage 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT APPENDIX: ADDITIONAL INFORMATION ABOUT RENTAL DEBT MODEL Overview of Federal Reserve Bank of from $1.7 billion to $2.2 billion. However, this Philadelphia Model. The national model built by increase is more than offset by our office’s revised the Federal Reserve Bank of Philadelphia tracks estimate for UI benefits. households over the course of the pandemic, The Federal Reserve Bank of Philadelphia’s adjusting monthly household income downward model is sensitive to assumptions about UI for job losses and upward for federal stimulus and benefits because the federal enhancements greatly unemployment insurance (UI) benefits. Based on increased the average weekly benefit unemployed how these households’ incomes change during workers receive. The Federal Reserve Bank of the course of the pandemic, some households are Philadelphia’s national model assumes a UI take-up estimated to have insufficient income to pay both rate of about 50 percent—that is, that about monthly rent and other nonhousing costs. When 50 percent of eligible unemployed workers receive this occurs, the model assumes these households UI benefits, including the federal enhancements. In do not pay their full monthly rent. Each month, our review, however, we uncovered a discrepancy rental debt accumulates for these households. By between this key assumption and available state December 2020, the initial analysis estimated that administrative data. Specifically, the model assumes California renters would owe a total of $1.7 billion. that half of California’s 2.6 million unemployed Updated California-Specific Assumptions. workers (as of the peak in April) received UI Our office provided updated California-specific benefits, for a total of about 1.3 million recipients. information on renter nonhousing costs, renter However, administrative data from the state’s savings rates, and statewide UI benefits. Employment Development Department show that Specifically, our office revised estimates for monthly more than 4 million workers received UI benefits in nonhousing costs upward from $8,000 per person, April. Our review suggests an actual take-up rate per year to $12,000 per person, per year to reflect that is well above 100 percent. (The vast majority a higher cost of living in California. We also revised of this discrepancy is due to a difference between available savings downward from the original model how unemployment is calculated in federal surveys assumption that renter households had 5 percent and how UI eligibility is determined by the state, not of their annual income in available savings. As a fraudulent claims.) conservative estimate, our revised assumption In light of this discrepancy, we revised the UI was that the average California renter household benefit take-up rate assumption from 50 percent had no available savings to cover rent and other to 100 percent. This revised assumption has the expenses in the event of a job loss. Together effect of reducing total unpaid renter debt. After these adjustments increased unpaid renter debt adjusting the unemployment insurance take-up in California relative to the initial findings in the rate assumption upward, the model’s estimate of Federal Reserve Bank of Philadelphia’s analysis. total unpaid renter debt falls from $2.2 billion to Specifically, these assumptions increase the $400 million as of December 2020. estimate of total rental debt by about $500 million, www.lao.ca.gov 9 analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Lourdes Morales and Chas Alamo, and reviewed by Ginni Bella Navarre, Brian Uhler, and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 10 LEGISLATIVE ANALYST’S OFFICE