622: Foreclosures up 132% – Housing Crash or Market Correction?

SHOW NOTES FOR EPISODE 622: FORECLOSURES UP 132% – HOUSING CRASH OR MARKET CORRECTION

With foreclosures up 139% over a year ago, inflation at a record high, and mortgage interest rates on the rise, are these signs that a housing market crash is the horizon?  In today’s podcast, Bill examines what these numbers are really telling us and whether we need to have cause for concern.

Introduction

As I was reading through real-estate data this month, three stats caught my eye.

• The first: that the number of active foreclosures (this is when the foreclosure process has begun on a seriously delinquent loan, but it has yet to be completed and liquidated) edged up by more than 7,000 in March — the first year-over-year increase in almost 10 years, according to mortgage technology, data and analytics provider Black Knight.
• Secondly, more than 78,000 U.S. properties had a foreclosure filing during the first quarter of 2022, which is up 39% from the previous quarter and up 132% from a year ago, according to real-estate analytics company ATTOM.
• And third, serious mortgage delinquencies — those 90 or more days past due — are 70% higher than they were pre-pandemic, according to Black Knight.

While those numbers seem grim, pros say the reality isn’t as bad as it looks: Though active foreclosures are up on a year-over-year basis, the number of loans in active foreclosure is still way below historic norms. On average, prior to the pandemic, the country saw about 30,000 to 40,000 foreclosure starts per month. But the foreclosure moratoriums that were put in place as part of the CARES Act in response to COVID-19 drove all of that normal activity to a halt. And for the most part, the continued low foreclosure starts are because the vast majority of folks who had taken advantage of forbearance have come out of such plans and returned to performing on their mortgages. And those who remain in forbearance may still have protection against foreclosure until they reach the maximum allowable forbearance period.

As for foreclosure filings, Rick Sharga, executive vice president of market intelligence at ATTOM, says that though “foreclosure activity increased significantly in the first quarter of 2022 … that doesn’t indicate a sudden weakness in the housing market, or the U.S. economy. Mortgage servicers are essentially ‘catching up’ on processing foreclosures on loans that were already in default or more than 120 days delinquent prior to the pandemic. Many of these loans are fairly old — issued prior to 2009.” And he adds: “We’re not expecting to see a huge wave of foreclosure activity anytime soon. … Even with the dramatic increase in [first quarter] foreclosure activity, we’re still running at about 50% of the normal level.”

And finally, regarding serious mortgage delinquencies, though they are up since the pandemic, in March they fell 12% for the strongest single-month improvement in 20 years, and there are actually more than 1.2 million fewer serious delinquencies than there were last March, Black Knight reports. What’s more, delinquencies overall are way down. Black Knight reports that 30-day delinquencies — borrowers who were just a single payment past due — plunged 20% from February. The reason for this decline? A combination of rising employment, student-loan deferrals, strong post-forbearance performance and millions of refinances has helped put downward pressure on delinquency rates.

Why do foreclosures and delinquencies matter to the housing market?

We watch foreclosures and delinquencies because they are often a sign of distress, which can indicate weakness in the housing market. Given the decrease in delinquencies from a few months ago, experts suggest that even a minor uptick from the beginning of the year isn’t a reason to worry. “These delinquency rates are so low that they’re not having much effect on the overall housing boom,” says Jeff Ostrowski, analyst at Bankrate. Although the housing market needs any and all new inventory, Ostrowski says he doubts the volume of foreclosures will be enough to really make a dent in the inventory squeeze. “Foreclosures are at a very low level and the legal process can take months, so I don’t expect any real fallout from the foreclosure uptick,” says Ostrowski.

What does this all mean for home buyers and sellers?

Pros say you shouldn’t expect a shift in the housing market as a result of these foreclosure upticks. “With demand for homes exceeding supply by so much, no one is going to get a foreclosure for a steal. Competing buyers are bidding up prices for all homes, including foreclosures,” says Holden Lewis, a home and mortgage expert at Nerdwallet.

It’s possible however, that you’ll come across foreclosed properties when searching for a home — and if you’re considering buying one, you’ll likely want to understand the different types of foreclosures listed for sale. “Many real estate investors are looking for a deep foreclosure bargain, but it’s still a seller’s market,” says Lawrence Yun, chief economist at the National Association of Realtors.

Depending on the stage of the delinquency process, you may find pre-foreclosures where a lender notifies the homeowner that they’re in default; short-sales where a homeowner tries to sell the home for less than the mortgage value due to financial distress; sheriff’s sale auction where properties in default are sold at courthouses, bank foreclosures known as real estate owned (REO) properties, and government foreclosures where properties are purchased with loans from the Federal Housing Finance Agency or Veterans Administration.

Properties in foreclosure can be found on the multiple listing service (MLS), so you don’t need to go hunting undercover for them — they’re available for anyone to see.  “Properties going through foreclosures are also listed in newspapers, bank offices and websites. For buyers considering a foreclosed property, auctions are another venue to find available houses,” says Ratiu.

That said, a serious delinquency can be devastating for a homeowner because it means a hit to their credit score and potentially a default and foreclosure, says Ostrowski. The silver lining is that because prices are holding strong, a struggling homeowner should be able to sell their home before losing it, but the same homeowner then has to keep themselves afloat in an expensive rental market.

Housing Crash or Correction?

Speculation about a possible housing bubble has taken full bloom this spring homebuying season.

And talk of bubbles inevitably leads to the question of whether the bubble will pop with a crash or more gently ease back to earth in a modest correction.

As the Federal Reserve’s decision to raise interest rates from their near-zero levels propels mortgage rates to a twelve-year high, it’s put additional pressure on housing costs. With housing affordability sitting at a decade low, the homebuying frenzy that rocked the real estate market is beginning to fizzle — and that means a larger shift is looming.

“While springtime is typically the busiest homebuying season, the upswing in rates has caused some volatility in demand,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “It continues to be a seller’s market, but buyers who remain interested in purchasing a home may find that competition has moderately softened.”

As homebuyer demand wanes, either one of two things can come next: a correction or a crash.

The former would entail a gradual drop in prices to more sustainable levels, whereas the latter would result from either a rapid drop in prices triggered by widespread panic from homeowners and investors or a wave of foreclosures.

However, with homeowners leveraging more than $3.2 trillion in home equity and mortgage lenders enforcing strict standards, it’s unlikely the real estate market is heading towards a crash — especially the likes of 2008.

This isn’t the housing market of 2008

The COVID-19 housing market is drawing many comparisons to the real estate market of the mid-2000s, but the two periods couldn’t be more different.

“This is not the same market of 2008,” Odeta Kushi, First American’s deputy chief economist, previously told Insider. “It’s no secret the housing market played a central role in the Great Recession, but this market is just fundamentally different in so many ways.”

The housing bubble that led up to the 2008 crisis is attributed to a combination of cheap debt, predatory lending practices, and complex financial engineering that resulted in many borrowers being placed into mortgages they could not afford. The situation triggered a foreclosure crisis among homeowners and a credit crisis among the investors who owned bonds backed by defaulted mortgages and birthed a global recession.

In 2022, the real estate market is in a much better position. Almost all American households have rebuilt their nominal net worth to pre-recession values and lending standards have tightened while home values have soared.

However, despite the market’s improvement, there still remains a great imbalance between supply and demand. But as buyer demand declines amid soaring costs, it’s easing competition — and that could mean a correction rather than a crash is on the way.

The real estate market is bracing for a ‘soft landing’

As home buyer demand falls, the real estate market is approaching a slowdown.

According to the Census Bureau, U.S. new-home sales have declined every month in 2022, and in March, they fell to a four-month low — highlighting the impact soaring borrowing costs are having on potential buyers.

“Higher mortgage rates along with the really strong home price appreciation create affordability challenges for many homebuyers and that’s going to slow the market down,” Mark Palim, Fannie Mae’s deputy chief economist, told Insider. “We already have a slowdown in both home sales and the rate of home price appreciation.”

According to real estate database Redfin, 12% of homes for sale had a price drop during the four weeks ending April 3, up from 9% in 2021 and the highest share since December.

“The slowdown over the last two weeks has felt significant, Dee Heyerdahl, Redfin real estate agent, said in a statement. “Usually April is when the spring home buying and selling market begins to heat up, but this year things are cooling down a bit instead.”

Doug Duncan, the chief economist of Fannie Mae, thinks the housing market is bracing for a “soft landing.”

“Mortgage rates have ratcheted up dramatically over the past few months, and historically such large movements have ended with a housing slowdown,” Duncan said in a statement. “Consequently, we expect home sales, house prices, and mortgage volumes to cool over the next two years.”

As the real estate market cools, the fundamentals that supported its growth — like record high home prices and home equity —  are likely to keep it relatively healthy. This could mean a correction rather than a crash is on the horizon.

House prices started 2022 with a dip in one-third of U.S. markets — including Los Angeles County — as rising interest rates, pricey options and shaky economics seemed to chill the pandemic era’s buying binge.

My trusty spreadsheet reviewed quarterly median sales price stats for existing single-family homes in 185 metropolitan areas tracked by the National Association of Realtors. I focused on quarter-to-quarter price changes — instead of the year-over-year performance that inspired the “First Quarter of 2022 Brings Double-Digit Price Appreciation for 70% of Metros” headline on the association’s press release announcing the latest edition of these statistics.

Topline

Despite what you may be hearing about widespread pricing strength, the typical buyer paid less in 64 metros — or 35% of all markets tracked — between the first three months of 2022 and last year’s fourth quarter.

The declines were concentrated in smaller markets in the Eastern U.S. In fact, one of the Realtors’ four regional indexes — the Midwestern markets — fell 1%.

The weakest metro performance was in Rockford, Ill., down 11.3% in three months, followed by Akron, Ohio, down 9.7%, Topeka, Kansas, down 9.5%, Springfield, Ill., down 9.1% and Binghamton, N.Y., down 7.7%.

Among eight California metros in the study, only L.A. County had a quarterly decline of 0.7%. The nearest losing market was 1,300 miles east — Oklahoma City, off 1.6%.

And, yes, the Realtors’ overall U.S. price index did rise 2.1% for the quarter.

Details

This is no anomaly. In fact, it’s an improvement over the end of 2021.

The fourth quarter saw even more falling prices as 104 metros saw declines — or 56% of the nation. California drops? Three of eight metros were down: L.A. County off 7.3%, San Diego off 0.6% and San Francisco off 3%.

Even the U.S. price index fell 0.7% with regional dips in the Northeast (5%), Midwest (4.5%) and West (0.2%).

And last summer, 36 metros had price declines — or 20% of the nation. California’s drops in the third quarter included three of eight metros: San Jose (2.9%), San Francisco (2.5%), and Orange County (0.9%). The U.S. price index rose 1.5% with no regional declines.

This same math also details the insanity of spring a year ago. In 2021’s second quarter, there was no quarterly price dips anywhere in the nation. The U,S, median rose 12.4% in those three months.

Bottom line

A few modest price drops are not a real estate catastrophe. Yet the home-selling industry is lucky that price discussions often center on year-over-year changes.

So, owners and their salespeople will focus on the fact that just three U.S. metros had price declines in the 12 months ended in 2022’s first quarter — Cape Girardeau, Mo., off 2%, Topeka, Kansas, off 1.9, and Rockford, Ill., off 1%. They’ll also cheer nationwide pricing that’s up 15.7% over that same period.

Measuring economic trends by looking at 12-month changes tends to smooth the ups and downs of any benchmark — whether the volatility is tied to seasonal variations, short-run impacts of events, or just noise in an economic yardstick. But this statistical softening can also delay the reality check that’s much needed by markets of any asset at inflection points.

Consider how Wall Street gyrations are viewed.

After a turbulent first three months this year, most investors focused on the Standard & Poor’s 500-stock index’s 5% decline between Dec. 31 and March 31 — the first quarterly drop since the 20% pummeling at the pandemic era’s start.

This pullback suggests share prices aren’t backed up by economic fundamentals. Inflation stresses household budgets and corporate bottom lines. Plus, pandemic, supply chain and geopolitical uncertainties zap confidence with consumers and CEOs alike.

Few stock investors revel in the year-over-year result: The S&P 500’s 15% gain between the first quarter and the same period a year earlier.

Let’s be honest. Real estate’s reality isn’t much different. Prices defy economic logic. All of Wall Street’s big-picture worries are amplified by homebuying affordability being slashed by the apparent end of the Federal Reserve-induced mortgage rate giveaways.

Do not forget house hunters are practical folks. At least those who are looking for a home and not an investment.

These people live in the here and now. They don’t search for shelter by spending lots of time thinking about what prices were a year ago. Price indexes adjusted for seasonality or inflation or length of ownership don’t change their budgets, mortgage rates or what’s on the market.

So early 2022’s softer pricing is welcome news.

References:

• https://www.marketwatch.com/picks/foreclosure-filings-are-up-132-from-a-year-prior-heres-what-that-means-for-the-housing-market-and-its-not-what-you-might-think-11651351836?tesla=y
• https://www.businessinsider.com/housing-crash-unlikely-but-correction-is-probable-2022-5
• https://www.ocregister.com/2022/05/04/house-prices-drop-in-one-third-of-u-s-and-la-county-realtor-stats-say/

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