With the rapid rise in interest rates, we have seen in the latter part of 2022, one might wonder if that will precipitate a foreclosure storm. Unlikely. Let’s see what the data brings to light.
Attom Data has been tracking foreclosures for decades. They are claiming the current market is shielded from a foreclosure storm by several key factors.
- First, changes in the lending practices initiated by the Dodd Frank Act in 2010 greatly reduced foreclosures. Even before the pandemic they were a bit low. The Frank Dodd Act has created borrowers that are eminently more qualified than in the past. Their loan performance has been strong, and this has curtailed foreclosures, seeing a drop of about 1% from 550,000 loans to 250,000 loans going to foreclosure.
- Additionally, the pandemic brought about the “foreclosure moratorium” as well as forbearance programs which reduced loans going into foreclosure. About 8.3 million borrowers took advantage of the forbearance programs that allowed them to postpone mortgage payments for up to two years if their income had been impacted by the pandemic. This program was incredibly successful, likely preventing 3 million to 4 million unnecessary foreclosures from happening. The end of these programs has seen foreclosure activity resume to about 50% of where it was in 2019.
What else is different? Equity. A full 93 % of borrowers who are in trouble with their mortgage payments today have positive equity in their homes. Many of those owners are selling their home before the foreclosure, recovering their equity, and moving on.
Of the properties that do go to foreclosure auction, they sell at about a 70% rate, which is twice the normal rate of sales at auctions. That means the auctions are competitive with fewer properties to sell and amble buyers bidding.
Bottom line is there is just not nearly as much foreclosure inventory in this current real estate down trend as there was in the 2008 crash.
National Association of Realtors and Freddie Mac are also acknowledging that affordability has dropped dramatically with the doubling of mortgage rates in a single calendar year. This has resulted in fewer homes for sale and fewer real estate transactions which will likely continue through 2023.
So, one might wonder, will the low inventory keep the prices high in 2023? Likely yes, though a not at the pandemic prices. The low inventory will likely keep our markets from cratering. And builders have reduced housing starts as well. Take note: 70% of homeowners have mortgage rates at 4% or less. Trading that rate for current rates is going to be hard, meaning they will likely delay selling until mortgage rates drop significantly.
We are always happy and grateful to establish connections with people who have interest in the real estate market. Would you consider contacting me if you need or anticipate needing help with real estate?