H1 US Foreclosure Update: Why Everyone Got It Wrong

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.

Source

White and Brown Concrete Building

The 2024 Multifamily and Commercial Real Estate Forecast from Commercial Property Advisors

Peter Harris and Julia Sheean from Commercial Property Advisors (CPA) discuss the outlook of commercial real estate for the year to come in the US. See the summary of their forecast:

2024 Interest Rates: Predictions suggest that interest rates will likely drop in 2024. The forecast attributes this potential drop to an election year strategy, anticipating a move by the president to boost the economy and secure re-election by lowering interest rates.

Multifamily Market Stability: Expectations are that the multifamily market will remain strong in terms of pricing and rents. The analysis points to the continued demand for rental properties, driven by high home prices and economic factors, leading to an increase in long-term renters.

Impact of Maturing Multifamily Loans: The market may witness distress in the multifamily sector due to maturing loans, with an estimated $49 billion worth of loans set to mature in 2024. The prediction suggests potential opportunities for investors as distressed properties become available, particularly in value-added deals.

Dynamics of Other Real Estate Sectors: Self-storage and industrial flex space are anticipated to perform well in 2024. The self-storage sector is expected to benefit from downsizing trends during economic uncertainties. Industrial flex space, driven by the growth of e-commerce, is seen as a strong investment.

Office Market Challenges and Opportunities: The office market faces challenges, with high vacancy rates, especially in C-Class office buildings. However, opportunities may arise in repositioning and upgrading A-Class office buildings, requiring significant capital investment.

2024 Economy and Consumer Sentiment: Consumer sentiment is noted as a crucial factor in the economic outlook. The analysis suggests that the average consumer might feel hesitant or fearful about the economy. Despite this, the overall sentiment is seen as an opportunity for commercial real estate investors to capitalize on potential deals.

Investment Wisdom: The advice for investors in an uncertain market includes actively seeking opportunities, becoming a continuous learner in real estate, and seeking mentorship or professional guidance. The emphasis is on making informed decisions, especially in a market with potential opportunities for those who are well-prepared and strategic.

Focus on Income, Appreciation, and Depreciation: The key focus for investors in 2024 is on investments that provide a combination of income, appreciation, and depreciation. This three-pronged approach is highlighted as crucial for long-term wealth building and financial success.

Closing Remarks: The video concludes by urging viewers to focus on opportunities in 2024 that align with the principles of income, appreciation, and depreciation. The overall tone remains optimistic, labeling 2024 as the “Year of Opportunity” for commercial real estate investors.

Statistically-speaking, the US housing market is not in a bubble and is not going to crash yet

Rick Sharga from ATTOM, a property data provider was invited to BiggerPockets’ BiggerNews podcast to discuss the current housing market conditions in the US and why we have not seen a market crash yet (despite what some “gurus” say)

  1. Still a strong demand for houses but slowing (19 consecutive months of lower home sales on year-over-year basis) but still high enough to keep price up
  2. On the other hand, credit applications are decreasing and consumer confidence is at its lowest for a decade due to Covid, high inflation (including for housing prices, +17% year-over-year), the war in Ukraine, mortgage rate doubling in one year increasing monthly payments by 27%
  3. Inventory and days-on-market slightly up from historic lows as the market seems to normalize
  4. No national bubble or crash expected but some local markets (Bays area, Austin, Boise…) may see a correction, especially in the higher-end of the market where there is fewer competition. Rick defines a correction as a 5-10% drop in market value before recovering
  5. Current market conditions are totally different from the Great Recession from 2008 (which was caused by an over supply of homes for sales and many more under constructions, followed by foreclosures when the lending frenzy stopped).
  6. 1.5 to 2 months of supply currently on sale which is the third of what we should have in a healthy market. New construction also lagging due to supply chain disruptions
  7. Demand is demographically-based, driven by millennials which are looking to buy their first house.
  8. First-time buyers represents 26% of loan applications, versus 46% during the Great Recession), meaning that today, most buyers have a lot of equity they can use to fund large down payments which lowers their monthly payments. There is currently $27 trillion in home owner equity, some of the amount will be used for home improvements through home equity line of credit rather than moving out.
  9. Rental prices have gone up faster than mortgage payments
  10. Delinquency rate at its lowest since the creation of the metrics in the 1970s
  11. Good economics conditions : the economy is creating jobs and the unemployment rate is very low
  12. More cautious and thoughtful money coming from individual investors today, with focus on longer term investments as 60% of investors are rental property owners. On the flip side, the focus nowadays is truly on value-add improvements rather than the arbitrage strategy which was like day-trading real estate before the Great Recession. Lenders have also tightened credit conditions.
  13. Inflation will remain the wild card as it hits people on the low-end of the market, that is to say, people who already have problems buying gas and food
  14. The current market favors investors who can pay cash
  15. The rapid increase in some markets is due to investors moving from high-price markets to lower-price markets like Boise, Idaho (+45% in one year). Utah and Phoenix have also experienced a similar phenomenon
  16. During the last recession (which was the only real housing market crash in 100 years), 33% of all home owners had negative equity in their homes, versus 90% of people in foreclosures today who have positive equity. Delinquent borrowers therefore manage to sell their homes before the auction cycle and very few properties are eventually repossessed by lenders contrary to 2008.

Impacts of rising interest rates in the US for real estate investments

David Greene (BiggerPockets) and Christian Bachelder from www.the1brokerage.com discuss the impacts of the recent increases in mortgage rates

  1. Interests rates are up +150 to 200bps in the last 3 months
  2. However, no decrease in number of persons pre-approved for credit and competition among buyers is still fierce
  3. The real estate market has more a supply issue rather than an interest rate concern (besides, rates should continue to go up this year as per the Federal Reserve’s agenda to fight inflation).
  4. Institutional investors “smart money” is still buying real estate at the moment to capture cash flows and appreciation
  5. Pro tips provided by Christian Bachelder :
    1. Get pre-approved first as rates are moving up quickly, it is important to figure your monthly payment. It will also provide confidence for sellers with multiple offers
    2. Build a relation with a credit broker or a loan officer rather than shopping for rates. A broker that knows you well will be able to provide the best advice on the types of loans that will fit your strategy over time, especially when you grow your portfolio.