Because of COVID-19, people are moving out of densely populated urban locations, opting for more space in suburbia and rural locations.
This has caused a rise in real estate prices in certain areas and a drop in others. Combined with approximately 8.2% of all mortgages being in delinquency—nearly double that for first-time homebuyers—and 7.2% being in forbearance, it’s a source of dismay for some people while an opportunity for others.
For many, this conjures the memory of real estate prices continuing to rise in the U.S. until late 2006-early 2007. People thought property values would never go down, mortgage lenders were giving loans to anybody with a pulse, and the table was set for disaster. The current situation is substantially different, but it’s still primed for volatility in certain local markets.
When the housing bubble burst, real estate values went down across the board (starting at the end of 2006 and flattening out in 2012), but more so in certain lower market properties. This caused the subprime mortgage market to experience record delinquencies, defaults, and foreclosures and the obliteration of housing related securities.
This came to be known as the Financial Crisis of 2007–8 (also called the Subprime Mortgage Crisis or the Global Financial Crisis). It led to a plummet in securities tied to the U.S. real estate market, damaging financial institutions globally and eventually resulting in the international banking crisis and the Great Recession.
Today’s situation in the real estate market is not the same. However, there are parallel legal issues that can potentially arise between buyers and sellers as real estate prices rise sharply in areas of high demand and drop quickly in others.
With steadily rising prices, some sellers who enter into contracts but don’t close quickly feel that they sold their property for too little. This leads some sellers to refuse to close, at which point buyers often retain attorneys to bring actions for “specific performance” against them.
When one party breaches a contract, the other party may demand that the contract’s stipulated performance—in this case the sale of a property—be enforced, rather than receive monetary compensation (for which there is no reasonable way to calculate damages). Accordingly, a Court may issue an order directing specific performance, requiring the seller to honor the contract and sell the property at the agreed-upon price.
Specific performance is a form of equitable relief that’s usually not available if monetary damages are deemed sufficient to address the breach of contract. Because real estate is considered unique, the Courts have carved out this equitable cause of action.
On the other hand, when prices plummet, and as buyers of private and commercial properties are reluctant to close, an action to retain the down payment can be brought by the sellers.
After the real estate bubble burst, some buyers felt they were paying too much for the property and attempted to get out of the contract without a legitimate reason (e.g., unable to obtain a mortgage). Consequently, sellers retained counsel and brought actions claiming a breach of contract and sought to retain the down payment.
THEN VS. NOW
What we are seeing now is a “micro phenomenon” in real estate, localized migrations from densely populated cities to spacious suburbia. While the market is volatile, we do not see this as a widespread real estate bubble as we had in 2007–2012.
However, given the loss of jobs due to the coronavirus pandemic and uncertainly regarding its future, we remind our clients to be cautious and thoughtful about decisions they are making in the real estate market.
For any assistance with real estate transactions or litigation, contact us.
Richard Apat is the head of Vishnick McGovern Milizio LLP’s Real Estate Litigation Practice. His work includes boundary disputes, adverse possession, easements, partition actions, breach of real estate contracts, specific performance, down payment forfeiture, fraudulent deeds or transactions, building collapse cases, and other commercial real estate litigation. He can be reached at email@example.com and 516.437.4385 x152.