Is There an "Eviction Tsunami" Ahead? A Colorado Case Study

If someone were to earn a dollar for every article about the impending “tsunami of evictions,” that person would probably have enough money to buy an entire apartment building.

However, that giant wave so far has failed to materialize. And those predictions keep getting pushed off further and further into the future for a number of reasons, ranging from changing state and federal policies and unemployment benefits to broader factors like the election, COVID-19 transmission rates, and more.

So how has the coronavirus been impacting evictions through this strangest of years? Probably not in the ways one would think, but like so many other things in 2020, the future is still up in the air.

Colorado, which models the U.S. homeownership rate average, provides somewhat of a case study in terms of what’s happening in the rental market.

Evictions are stable

It seems logical that during such an unprecedented time of economic upheaval, a lot of renters would be unable to pay bills. But according to proprietary data compiled by the Colorado Apartment Association, that hasn’t been the case over the last eight months.

From March through September, evictions decreased by a drastic 53% to a fraction of normal levels. Out of the 5.8 million people and two-million-plus households in Colorado, 5,159 eviction actions have been filed across the state—far lower than the 18,250 in 2002, which was the lowest six-month eviction level ever in the Centennial State.

Unemployment shot up from 2.5% pre-COVID-19 to a tremendous 12.2% in April and back down to a still-not-great 6.7% in September. However, evictions have dropped significantly from the 38,183 filings in 2019. “There really is not a correlation between higher evictions and higher unemployment rates,” says Andrew Hamrick, general counsel and senior VP of government affairs for Apartment Association of Metro Denver.

There are a couple of reasons why, says Hamrick.

First, in hot economic cycles, there is a lower vacancy rate, which means there are fewer available homes for rent. With more tenants competing for units, landlords are often more indifferent to maintaining an existing lease. “Landlords end up filing eviction orders against a fish tank or a water bed,” says Hamrick. “Those types of evictions are higher when consensual moves are higher and those things happen with greater frequency in a hot market.”

And, according to Hamrick, a large share of eviction proceedings aren’t really the kinds of evictions people think of when they hear the term. If there is any ambiguity as to whether a resident has actually returned a property, landlords require a court order to take possession. If residents return the keys, give a written statement to confirm that they are gone, and remove all existing property from the unit, there’s no reason for a landlord to evict. But if those criteria aren’t met, a court order is needed.

“If you’re a property owner, you believe if this transaction falls apart, you have another good customer waiting in the wings,” says Hamrick. “In a time like this, they’re thinking, ‘If I get the place back and I’m not renting it, does it make sense to have it unoccupied?’ People are working to keep existing transactions.”

Hamrick certainly has some data to back him up. His metrics show that eviction in Colorado has been trending down for the past 20 years. In 2001, there were 38,353 eviction filings; 18 years later, in 2019, there were 38,183 despite the state’s population exploding by more than 1.2 million new residents in the same time period.

But other housing experts claim that the wave of evictions that should be taking place has been stemmed by federal and state eviction moratoriums. Governor Jared Polis reinstated another 30-day moratorium in late October—on top of the national Centers for Disease Control order—that bars property owners from pursuing eviction against any tenants experiencing financial hardship due to COVID-19.

“Evictions are not being impacted by COVID-19, because you can’t do them,” says Barton Thompson, senior advisor at Pinnacle Real Estate Advisors. “The real question is, will there be a wave of evictions once the order is lifted?”

Payment rates remain normal

Across the United States, rent collection rates have remained stronger than many would expect. The percentage of renters meeting their monthly payments has improved from April through September, and is only slightly below where it was in 2019. As of early fall, rent collection rates were less than two percentage points off normal, with Colorado’s numbers consistently ranking higher than the rest of the country’s. “The blessing is payment rates have been relatively normal,” says Hamrick. “We’re not seeing significantly greater levels of defaults.”

Much of that can be attributed to stimulus efforts. As of July of 2020, well over 50 million Americans had filed for first-time unemployment benefits between March and July and more than 20 million renters lived in households that had suffered COVID-related job loss, according to a report by Aspen Institute.

Though employment has gone up slightly since the summer—from March to July, unemployment rates hovered between 11.1% and 14.4%, far higher than the 10.7% peak of the Great Recession—unemployment benefits have decreased substantially. When the pandemic unemployment insurance benefits expired in July, those out of a job lost the extra $600 a month that was keeping them afloat, before President Trump signed over an extra $300 a week from the Federal Emergency Management Agency (FEMA).

Even with the increased unemployment benefits, renters who haven’t come up with their monthly payments have been turning to other sources to stay afloat. Some have been using credit cards to pay for housing, with a 43% increase in rent paid by credit card for the first two quarters of 2020 versus 2019. Many have been relying on food pantries to free up funds for rent; food pantry requests have increased by as much as 2,000% in some states. And 30% of renters across the nation report using money from government aid or assistance to pay for their monthly housing costs.

In Colorado, lawmakers allocated nearly $20 million from the federal CARES Act to emergency rental assistance with the Property Ownership Preservation Program. House Bill 1410, passed in late June, provides rental and mortgage assistance, along with guidance on how to access other housing services, to Coloradans struggling to pay housing costs during the pandemic. “It’s state-level rental assistance,” says Thompson. “They’ll pay the landlord the median rent for that neighborhood on behalf of the tenant. Typically, landlords and property management companies will fill out applications.”

In late October, another $2.6 million was allocated to the rental relief program. And Governor Polis recently announced the state would be sending out a one-time stimulus boost to more than 40,000 Coloradans who meet certain criteria by December. That will be right around the time the extra $300 per week from FEMA runs out.

What happens when that extra money dries up?

Government policy must change

Contrary to what some believe, not all landlords are giant corporations with endless cash flow. According to a 2015 Department of Housing and Urban Development report, there were between 10 million and 11 million individual investors managing an average of two units each. Many of these “mom-and-pop” landlords own just one unit, most often either single-family or duplex rental homes.

In the Denver Metro area, more than 70% of rental properties include seven units or less. According to the Colorado Apartment Association, small-scale landlords do not have the economic means to endure long-term defaults by tenants, regardless of how rare defaults may be. “When you’re an owner and have a tenant who can’t afford to pay rent for three or four months or has stated they’re not going to pay rent, the landlord still has bills to pay and a mortgage,” says Thompson.

While rent collection in Colorado has remained relatively high throughout the pandemic, COVID-19 cases are on the rise; unemployment is still high; and with a divided, lame-duck Congress, hopes for another round of stimulus have faded for the next few months.

Current policy has put both landlords and tenants in precarious situations. Landlords are getting stuck with the same monthly carrying fees, in some cases with no income to cover those payments. The tenants who are not paying rent, many of whom normally get by paycheck to paycheck, are still personally liable for the monthly lease fees at some point after the eviction moratorium ends. To make up for back rent, those tenants who could barely afford their current rents will have to increase their payments to make up for however many months they were unable to pay when all of this passes. As it stands, they can be subject to eviction if they cannot meet the elevated remittance. “If they’re evicted, they can be taken to collections and have that on their records,” says Thompson.

What should be done

There are two camps when it comes to solving the current situation.

One side believes the solution is to take the brakes off—including the eviction moratorium—and just let the markets return to normal. These folks, like Hamrick, assert that housing demand contracts in bad economic periods, as younger people move back in with parents, singles rent out second bedrooms, and couples that may have been considering a split realize it makes more financial sense to keep living together. Lower demand helps to decrease rent and encourages landlords to work out deals with their current tenants. “One can see shrinking demand for housing takes pressure off of rents and pressure off evictions,” says Hamrick.

Industry insiders like Thompson, however, claim that additional stimulus in the form of rent relief, which would ensure landlords get paid what they’re owed and take tenants off the hook for back rent, is the only path forward. He says, “If we don’t get some sort of rental assistance, yeah, I think it’s going to be bloodbath.”

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.