H1 US Foreclosure Update: Why Everyone Got It Wrong

In recent months, there has been a lot of talk in the real estate and investing communities about an impending foreclosure crisis. Many pundits and YouTube personalities have been predicting a surge in foreclosures that would supposedly lead to a housing market crash. But is this actually happening?

Are foreclosures really on the rise, and if so, are they going to tank the housing market? Let’s dive into the data and find out what’s really going on thanks to data compiled by Dave Meyer with Bigger Pockets

Before we delve into the current foreclosure trends, it’s important to understand what a foreclosure is. A foreclosure is the legal process by which a lender takes control of a property after the borrower fails to meet the mortgage payment obligations. The process typically begins with a notice of default and can include several legal steps depending on the state, ultimately leading to the property being reclaimed by the bank if the borrower cannot resolve the delinquency.

What is a Foreclosure?

The 2008 Crash: A Foreclosure Case Study

Many real estate investors are particularly sensitive to foreclosure data because of the role foreclosures played in the 2008 financial crisis. During that period, a significant number of homeowners defaulted on their mortgages, leading to a surge in foreclosed properties. This influx of distressed properties flooded the market, driving down home values and creating long-term economic repercussions. Investors who remember this period are understandably cautious about any signs of increasing foreclosures today.

Cooling the Housing Market

An increase in foreclosures can theoretically put upward pressure on housing supply, potentially cooling the entire market. If a large number of foreclosed homes hit the market, both homebuyers and investors might shift their focus to these properties, leaving other homes on the market longer and driving down prices. This is why monitoring foreclosure trends is crucial for understanding broader market dynamics.

2024 Foreclosure Data: The Surprising Reality

Contrary to popular belief, foreclosure activity is actually down year-over-year. According to recent data from ATTOM Data Solutions, there were approximately 177,000 properties with foreclosure filings in the first half of 2024. While this number might sound significant, it represents a decrease from the 185,000 filings in the same period of 2023.

Historically speaking, these figures are relatively low. For context, at the peak of the foreclosure crisis in 2010, there were nearly 2 million foreclosure filings in a single year. Even as recently as 2018, annual foreclosure filings were about double what we see today.

Regional Differences

It’s worth noting that while national foreclosure data shows a decline, there are regional variations. States like the Dakotas, Kentucky, Massachusetts, and Idaho have seen increases in foreclosure activity over the past year. However, these states do not necessarily have the highest foreclosure rates overall. New Jersey, Illinois, Florida, Nevada, and South Carolina continue to lead in foreclosure rates, with specific hotspots like Lakeland, Florida, and Atlantic City, New Jersey, experiencing higher levels of foreclosure activity.

Why Aren’t Foreclosures Rising?

There are several reasons why foreclosures have not surged despite economic pressures:

1. Stricter Lending Standards

After the 2008 crisis, the government and financial institutions implemented stricter lending standards. This has resulted in higher quality loans and borrowers with better credit scores, reducing the likelihood of default.

2. Government Interventions

Policies such as mortgage forbearance programs during the COVID-19 pandemic provided struggling homeowners with temporary relief, preventing a spike in foreclosures.

3. Bank Strategies

Banks have developed more sophisticated tools and programs to help homeowners avoid foreclosure. Their goal is to keep borrowers in their homes and maintain the interest income from performing loans.

4. Non-Housing Debt

Interestingly, while mortgage delinquencies remain low, other types of debt like credit card and auto loans have seen rising delinquencies. This suggests that the financial strain is more pronounced in non-housing sectors.

The Bottom Line

Despite the hype, the data shows that a foreclosure crisis is not imminent. Foreclosure activity remains low compared to historical standards, and the policies and lending practices implemented over the past decade have significantly improved the resilience of the housing market.

Conclusion

While it’s always important to stay informed and cautious, the current foreclosure data does not support the narrative of an impending foreclosure-driven housing market crash. Instead, the evidence suggests that American homeowners are in a relatively strong position, which bodes well for the stability of the housing market and the broader economy.

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